Gold Prices Could Rebound Despite Higher Real Yields

Gold prices have been struggling to reach $4,000 an ounce due to persistent inflation forcing markets to price in rate hikes and higher real yields. According to Jefferies, however, gold prices could still move higher next year despite these challenges.

The ongoing conflict with Iran has kept oil prices elevated, fueling new inflation fears. As a result, markets are pricing in the potential for two rate hikes this year, with the first increase expected in September. The Federal Reserve has reinforced these expectations after three committee members voted to raise interest rates following the July monetary policy meeting.

Jefferies analysts noted that real yields have moved significantly higher, with 10-year TIPS real yields at around 2.41%, compared to 1.94% at the start of the year. They pointed out that gold prices tend to move in response to changes in real-rate expectations rather than their absolute level.

Despite these headwinds, Jefferies remains relatively optimistic on gold prices later this year. The firm noted that both gold and gold equities have already undergone a meaningful reset, suggesting much of the recent repricing has already occurred. Christopher Wood, Global Head of Equity Strategy at Jefferies, warned that if the current AI capex boom implodes, the Federal Reserve will not be able to raise interest rates.

Wood stated, 'For such reasons, now is the time for investors to start accumulating gold and gold mining stocks again after an extended pause to refresh. The U.S. dollar debasement trade is only in abeyance.'