By Peter Hobson
LONDON (Reuters) - Concern among investors that the U.S. Federal Reserve will fail to control inflation is helping to lift gold prices despite a sharp rise in U.S. bond yields that would usually drive the metal lower, analysts said.
Real, or inflation-adjusted, returns on U.S. debt have for years been the strongest influence on gold, with higher rates assumed to make non-yielding gold less attractive.
But real yields on U.S. 10-year bonds have increased this year from around -1% to -0.5%, and gold has risen too - from $1,800 an ounce to around $1,850.
Gold and yields - https://fingfx.thomsonreuters.com/gfx/ce/klpykmrgapg/GOLD%20GRAPHIC%20YIELDS%20MEDIUM%20TERM.JPG
"The inflation narrative is seeping into the gold price at last," said independent analyst Ross Norman. "There's a sense the Federal Reserve is behind in terms of doing something about it."
U.S. consumer price inflation surged to a 40-year high of 7.5% in 2021 and the Fed still has not raised interest rates. Investors now expect as many as seven U.S. rate rises this year, but some fear these may come too late.
This, along with the threat of a Russia-Ukraine conflict, has pushed stock markets lower this year. [MKTS/GLOB]
Interest rate rises are typically seen as bad for gold prices because they tend to lift bond yields.
"(But) aggressive rate hikes may end up being positive for gold," said Saxo Bank analyst Ole Hansen. "They will further raise the risk of a policy mistake from the Federal Reserve as it increases recessionary risks."
Gold is often used as a hedge against inflation and as a safe investment during times of political and economic uncertainty.
Inflation has also surged in Europe and elsewhere, with little central bank tightening so far.
Exchange traded funds (ETFs) have bought 58 tonnes of gold for their investors this year after shedding 192 tonnes in 2021, World Gold Council (WGC) data show.
Inflation rises - https://fingfx.thomsonreuters.com/gfx/ce/dwvkrjmdopm/GOLD%20GRAPHIC%20CPI.JPG
Retail gold bar and coin sales leaped to an 8-year high last year and should remain strong, the WGC said, and demand in top markets India and China has rebounded.
However, trouble for gold could come if bond yields - still ultra-low by historical standards - turn positive, said Nicky Shiels, a strategist at MKS PAMP.
"I don't expect gold to outperform if 10-year real rates are rallying as strongly as they currently are from a +1% base," she said.
A Reuters poll conducted last month predicted that gold prices will drift lower in 2022 and 2023 as central banks raise interest rates.
ETF stockpiles and gold prices - https://fingfx.thomsonreuters.com/gfx/ce/xmpjojwlovr/GOLD%20GRAPHIC%20ETF.JPG