Prices appear to have lost their link to underlying risk sentiment, with prices now showing a negligible correlation to the MSCI World Stock Index. However, the relationship with price growth expectations has resurfaced, with the correlation between gold and the US Treasury 10-year breakeven – the spread between nominal and inflation-adjusted 10-year bond yields – rising to the highest in three months on 20-day percent change studies.
Last week, increasingly lackluster US economic data was reinforced by ominous comments from Fed Chairman Ben Bernanke as he delivered his semi-annual testimony to Congress, pushing 1-year rate hike outlook to the lowest in nearly 18 months based on a Credit Suisse gauge of traders’ priced-in expectations. All this translates into a tepid outlook for inflation, with the data set for release in the week ahead promising to further reinforce this view. Indeed, US consumer confidence is expected to drop for the second month to the lowest level in a year, durable goods growth is likely to prove muted, and preliminary GDP figures are set to show the pace of economic growth slowed for the second consecutive quarter in the three months through June. On balance, this promises to weigh on the yellow metal in the days ahead.
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