The US CPI is currently just above target at 2.3%, and long-term market expectations of inflation measured by the US inflation swap curve remains mid-range.  This is in stark contrast to all-time lows in nominal treasury yields which appear to be pricing in almost the end of the world.  Yet in 2008 when yields did not get as low as today, inflationary expectations went to sub 1% (and on a forward basis, the market was expecting a deflationary outcome).  This suggests the market today is anticipating stagflation rather than deflation.  It also indicates that the strong flow into US treasuries, UK gilts and German bunds should not necessarily be interpreted as a sign of deflationary expectations but rather that there is a systemic shortage of risk-free assets available for use of as high-quality collateral in the global financial system.

We would certainly not discount that inflation expectations could fall further.  But if inflation, as we expect, starts to rise, this will feed into break-even rates and real rates will fall again.  In gold’s case, the chart below illustrates this point nicely.

The expectation (as gauged by inflation expectation surveys) of negative real rates is often subsequently positive for gold.  Currently expected real interest rates are at -2.85%, which on average (over the last 34 years) has led to about a 15% YoY performance for gold.