Gold Intermarket: Drop in US inflation expectations is a big negative

US long-term inflation expectations as represented by the 10-year breakeven inflation rate are a big driver of gold prices. The metal being a hedge for inflation usually tracks inflation expectations higher/lower.

The 10-year breakeven inflation rate; the yield difference between 10-year Treasury Inflation Protected Securities (TIPS) and regular 10-year Treasury notes; dropped to 1.78% last week; the lowest level since November 10.

However, gold remained well bid on rising political tensions in the US. Moreover, the metal has rallied from $1222 (May 10 low) to $1264 (last week’s high) mainly due to the turmoil in Washington.

It also means that once the political uncertainty dissipates, the risk premium would evaporate and the metal would fall back in line with the weakening inflation expectations.