Gold is expected to reverse its decline as interest rate pressure eases

Gold is highly negatively correlated to U.S. interest rates, particularly real rates.So far this year, gold has seen its worst first-quarter performance since 2014, with the Shanghai gold 2106 contract down more than 10 percent, thanks to a surge in U.S. bond yields.However, since the second quarter, U.S. interest rate pressures are expected to ease, and real interest rates after adjusting for inflation may again be weak, gold is expected to reverse the previous decline.

The upward momentum of Treasury yields has weakened

Since bottoming in the second half of last year, the yield on the 10-year Treasury note has rallied strongly by more than 100 basis points to as high as 1.74 percent and is widely expected to rise above 2 percent this year.However, in the short term, at least in the second quarter, Treasury yields continue to rise weakly.

At present, the third round of US pandemic stimulus act is expected to spend 1.9 trillion US dollars, but the US fiscal TBA account is only 1.1 trillion US dollars, a simple estimate of the gap of hundreds of billions of US dollars, short-term large-scale bond issuance is urgent, the Federal Reserve will increase the bond purchase to reduce the cost of US bond issuance.It is worth mentioning that yields on US bonds have risen above the threshold of 2 standard deviations since mid-February.Historical data suggest that under similar circumstances, it is difficult for US bond yields to rise significantly on a sustained basis.

Gold's anti-inflation properties are worth looking for

Under the background of the outbreak, unlimited supply of money in the us and Europe and the United States, the M2 expansion is as high as 27%, compared to the total amount of fiscal stimulus is expected to more than $5 trillion, global inflation pressure surge, the CPI has been 0.1% since may of last year rose to a low of 1.7% in February, the second quarter a lot may experience significant inflation picks up, do not rule out the CPI hit a record high after the financial crisis.

First of all, from the perspective of crude oil price, the king of commodities, the global COVID-19 epidemic began to wreak havoc in Febrary-March last year. As a result, there was a sudden blockade in all regions, and the demand for transportation was sharply reduced. In addition, the huge storage costs caused the crude oil price to drop to negative value for a time.Since then, Nymex crude has recovered about tenfold to near $60, as producers have cut production, in particular higher-than-expected vaccinations this year, and major economies are expected to be unlocked.It is also worth noting that the CRB Composite Spot Index has recovered from last year's low of 348 to near 500, surpassing pre-epidemic levels by about 25%.

Secondly, from the perspective of the real estate market, as the impact of the epidemic weakened and the economic stimulus plan increased, American residents' house-buying behaviors were obviously active. Since the second half of last year, the monthly year-on-year growth rate of new home sales was basically as high as 20%-50%. The Standard & Poor's /CS housing price index in 20 large and medium-sized cities rose above 10% year on year, a 7-year high.Price pressures are expected to extend to the rental market.And considering that the outbreak is about to be unsealed, the US service sector is expected to accelerate recovery, which in turn will increase rental demand and lead to a rapid recovery in rental prices.Real estate rentals account for as much as a third of the U.S. CPI, and an expected rental recovery could drive inflation above 0.6 percent this year.

Moreover, while the printing of money has not historically triggered inflation in the United States, as in the last financial crisis, the current bailout is more likely to do so.First of all, the last round of bailouts mainly targeted enterprises, which caused a large number of corporate deposits to accumulate in banks and did not enter the real economy. However, this round of bailouts directly issued money for residents, and the effect of consumer spending is expected to be more obvious.Second, the previous round of excess money supply was absorbed by a variety of assets around the world. However, many asset markets are already at high valuations in this round of epidemic, so there is significantly less room to continue to absorb large amounts of money.