Gold's Price Still Too High for Current Economic Conditions

Gold's price has been declining, but it still hasn't fallen enough to match the severity of the current monetary environment. At $4,260 an ounce, gold is now about 24% below its January peak of $5,594.82.

The current macroeconomic configuration facing gold is quite challenging. The Federal Reserve raised its target range by 25 basis points last week to 3.75% to 4.00% and signaled that further tightening may be required. The US Treasury's 10-year real yield has also risen, reaching 2.76% on September 23.

The 10-year real yield is a crucial number in the gold discussion. It measures the return an investor can expect from holding a government bond after adjusting for inflation. Gold offers no coupon or contractual cash flow, so as real yields rise, the opportunity cost of holding gold increases.

Not only has the 10-year real yield risen to 2.76%, but it has also done so relatively quickly, increasing by 30 basis points over roughly two weeks. The nominal bond market has moved in the same direction, with the 10-year Treasury breaking above 5%.