Gold lags big moves in bonds, FX

The latest round of payrolls data has again been on the low side and bonds have been quick to rally on the expectation that the Fed is unlikely to modify its current stance on monetary policy anytime soon.

Gold has rallied in sympathy with bonds and the noticeable divergence between real rates and gold a month or so ago is no longer apparent.

What the chart on the left doesn't take into account is that the USD has also fallen quite a bit in response to shifting expectations of Fed policy. So while the move in gold has been in concert with bonds, its actually quite low relative to the current level of the Trade Weighted Index (TWI).

To be clear, when the TWI was last at this level, gold was ~$1450/oz.

This underperformance can be shown more formally through my simple econometric model, which uses the 10 year TIPs yield and TWI as explanatory variables.  The idea is that the model will take into account how gold is likely to have reacted to the current level of real interest and the TWI based on how it has done so over the last couple of years.

As the chart on the left shows, the model suggests gold should have bounced more than it has done over the last week or so.

There have been noticeable periods of divergence between the modelled and actual price of gold, which over this year has been useful in thinking about implications for what different markets are thinking about future policy moves (see this post).

In this case, I think perhaps gold is being too sanguine relative to the sizeable moves in other markets.  So perhaps there is a short term opportunity in gold.