After a short rally on Friday following the US NFP data, gold is on the back foot again.
As pointed out on Friday, since the middle of 2013, expectations of where US bond
yields are heading have been climbing steadily. The Bloomberg consensus forecast, back
in July 2013, was for the 10-year government bond yield to average 3.14% in Q4:14.
This consensus forecast has now risen to 3.38%. While it does not sound like a large
increase, inflation forecasts for the US are muted. In fact, expectations for US headline
inflation by Q4:14 have come down steadily, from 2.15% at the start of 2013 to the
current 1.9%. Although perhaps a somewhat naïve calculation of real interest rates, the
forecast implies that expectations for the 10-year real interest rate in the US by Q4:14
have risen from 1% a year ago to 1.5% currently. For gold, that is a large increase, and,
should consensus turn out to be broadly correct, rising yields will continue to put
downward pressure on gold. As pointed out in Commodities Daily of 28 March, there is
a strong negative correlation between the gold price and real long-term US bond yields.
Gold technical support is at $1,297 and $1,289. Resistance is at $1,312 and $1,321.
Furthermore, we maintain that Asia’s physical gold demand is set to disappoint this year
(relative to levels seen in 2013) should the current demand picture persist. We have
updated our Standard Bank Gold Physical Demand Index, and the YTD run rate for
2014 continues to track the demand trends seen in 2012 rather than those of 2013.
We believe that demand will pick up only when prices weaken.

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