Inflation breakevens have been rising and real yields have been falling this year, boosting gold
and silver prices. Gold and silver prices corrected this week and last week as the reflation narrative gained
traction, with 10y yields rising to their highest  level since early June. Fed policy has been very successful
in keeping asset markets supported, with the S&P now flirting with a new all-time high. The
correlation between gold and the S&P had reached at least 20-year highs (bottom-left chart), but
the S&P breaking to new highs may have led to the conclusion among some investors – rightly or wrongly –
that higher yields may come sooner than is currently priced in, leading to some profit taking in
gold and silver. Positioning had come very stretched (bottom-right chart), and so it is no surprise
the correction was abrupt.

Nonetheless, we are dip buyers in precious metals. The price action during gold’s sell-off
suggested strong buying below $1,900. We could still see some near-term down side, but the
longer-term picture remains constructive for gold (and silver). The Fed inching its way towards a new
inflation framework, allowing it to tolerate higher inflation. At the same time we have very
large government deficits. As we discussed in a recent report, Portfolios for the High Seas, the
combination of large deficits and central-bank monetisation, past certain thresholds, historically
has been ultimately inflationary. The US is very clearly moving in this direction.

Source: Bloomberg, Macrobond and Variant Perception