Gold Prices Stuck Despite Falling US Treasury Yields

On September 21, the US 2-30 year Treasury yield fell throughout the day, accompanied by a decline in the US Dollar Index. Despite this, spot gold initially dipped before rebounding and is currently trading around $4,365.

The market question here is why gold didn't surge immediately with the falling yields, given that it traditionally benefits from such a situation. However, according to the Fiscal Theory of the Price Level (FTPL), there are circumstances where falling real interest rates can also lead to lower gold prices.

In situations where the government's debt crisis worsens and higher real interest rates make repaying the debt more difficult, a substantial increase in the price level is required to fill the gap. This, in turn, pushes up gold prices as rising prices benefit gold as a universal equivalent.

Currently, with the US economy strong and inflation remaining sticky, nominal US bond yields have declined due to market repricing of US sovereign debt risk premiums, rather than monetary easing. As a result, gold has not rallied sharply despite the decline in nominal rates.