The gold-Treasury yield relationship was briefly interrupted this year

The long-delayed Fed "pivot" has been the story of monetary policy over the past year. With markets perceiving a Federal Reserve rate cut on September 18 as a certainty, it's worth examining the relationship between the Treasury market and gold -- the classic inflation hedge.

Usually, the gold price is negatively correlated with short-term yields. Over the past year, we can see that gold rose from about USD 1,900 per ounce to about USD 2,500 at the time of publication. Three-month bill yields, meanwhile, fell from about 5.3% to 4.9%. (We've inverted the right-hand Y axis on our chart.)

However, we've highlighted a four-month period where this relationship diverged. From about February, it was apparent that strong US economic data and stubborn price increases meant the Fed wasn't ready to pivot yet; yields stayed the same, but gold kept rising, setting records. Central banks were buying the metal; in April, gold's rise coincided with an equity correction.

The gap began closing in July, when weaker data started convincing the market that a rate cut was finally in the cards. Bill yields began declining; gold kept rising, retaining its luster as a safe-haven asset.

We've included another chart on longer-term gold prices. The inverse relationship with bond yields tends to hold significant sway in the presence of strong market expectations for a Fed hike or cut. Lower expected Treasury yields help reduce the overall opportunity costs of holding gold (and vice versa, when rate hikes are imminent -- as can be seen in gold's retreat when the Fed started hiking rates in 2022).

However, over the longer run, real rates (i.e.: a function of both nominal yields and inflation) have demonstrated a stronger inverse relationship with gold prices.

Our final chart returns to that likely rate hike at the Fed's September 18 meeting. CME Group publishes FedWatch, which measures prospects for the Fed's next move by tracking futures markets. We can see the results of this year's "higher for longer" narrative as expectations for a cut in March and then June rose and receded, dissuaded by the continuing strength of the US economy.

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