The Dollar vs. Gold & Real Yields
Historical Relationship, Anomalies, & Outlook
Historically, rising Real Yields have corresponded with outperformance by the Dollar while Gold lags. However, in the past 18 months, we've observed a notable deviation from this norm. The Dollar's peak relative to gold occurred in the fall of 2022, after which gold has significantly outperformed the Dollar despite the continued increase in real yields. This decoupling from the historical relationship suggests an impending reversion to the mean. In other words, this anomaly is unlikely to persist.
In the near term, we expect Gold to continue correcting as it cools off following a sustained period of strength. Recent momentum for the precious metal reached over 2 standard deviations from the mean, often a precursor to pullbacks.
However, the longer-term outlook for gold remains favorable due to sustained purchases by Global Central banks. Following significant acquisitions in 2022 and 2023, Central Banks achieved a new quarterly record in Q1 of this year.
The Dollar, currently overvalued, is anticipated to regress toward the mean in the second half of the year. This adjustment process may take time, given potential support from cyclical growth in the U.S. compared to other global economies. Nonetheless, further upside for the Dollar appears limited. As growth and interest rates moderate, particularly with anticipated Fed rate hikes toward year-end, the Dollar's strength should diminish.
Considering the above dynamics, the normalization of this historical relationship is likely to occur through a decline in Yields. While a rate hike is no longer as imminent as previously anticipated, markets are currently pricing in the first Fed cut to occur in September of this year. This expectation should cap the upside for yields in the interim, as investors pivot towards bonds to secure higher yields before anticipated rate reductions by Powell & Co. thru year-end.
