The chart below shows the relationship between the U.S.10-year real yield and the Gold price. The real yield is calculated by subtracting the 10-year Treasury Inflation Protected Security breakeven rate (the measurement of consumer price inflation expectations) from the nominal 10-year Treasury yield. The real yield is inverted so the graph shows that when the real yield is declining, the gold price is going up, and vice versa.
Gold yields nothing and so, when the real yield on bonds turns negative, Gold is said to become more attractive.
Gold bugs who show this chart are extrapolating the trend in the real yield to become even more negative. That can happen by either a) the 10-year yield falling relative to the breakeven rate or b) inflation expectations rising relative to the 10-year yield.
At the start of the year, the 10-year breakeven rate was at 1.80%. That was the market expectation of the average annual rate of change in the Consumer Price Index over the next 10 years. Now, it is hovering around 1%. Inflation expectations have almost halved in less than four months, but the real yield has turned negative because the 10-year nominal yield has dropped even further.
Gold has not rallied because people are expecting inflation, as many people would expect to justify gold's advance. Instead, with price inflation expectations dropping, people are actually expecting slower price inflation. We fully expect price inflation expectations to continue to slow as the Great Deflation develops.
If that is the case, the conclusion is that Gold bulls using this chart to justify their stance will have to expect the U.S. 10-year yield to fall into negative territory. That could happen, of course, but the point is that as deflation expectations become ingrained, the real yield will probably move back into positive territory as the breakeven rate drops below the 10-year nominal yield.
Indeed, our Elliott Wave analysis suggests that Gold may have already topped out.