Gold has been a lousy performer for most of the last decade. In hindsight, it's clear that it topped between 2011 and 2012 as worries crested with the sovereign debt crisis in Europe and the fallout from potential defaults. Additionally, the consensus at that time was that QE and zero percent interest rates (ZIRP) would lead to raging inflation. And, this turned out to be incorrect.

As a result, real interest rates mostly moved higher, and gold trended lower. Real interest rates are what move gold prices, outside of extreme inflation or deflation scenarios where gold could function as an effective hedge.

This is why gold has failed to meaningfully move higher over the past year despite weakness in stocks and bonds. But, there is an increasing amount of evidence that developments are afoot that could change gold's primary trend.

The major factor is that it's clear that long-term rates have peaked along with inflation. The November CPI data came in below expectations and marked the second, consecutive month of declining inflation. Many analysts now see monthly inflation going negative in the first quarter of 2023 due to weakness in leading indicators and outright deflation in certain components.

As a result, long-term yields have backed off their highs. For example, the 10-year Treasury yield has backed off from above 4.2% in late October to below 3.5% currently. Of course, there is no weakness in shorter-term yields as the Fed has shown no inclination of budging from its current stance.

Still, it's only a matter of time before the short-end does react if inflation keeps trending lower as this neuters the Fed's motivation to hike. Thus, it's likely that recent gold strength is reacting to these favorable developments as real rates move higher on a longer-term basis, and it seems inevitable that they will follow on a shorter-term basis as well.

Thus, we could be in for some period of gold and precious metals outperformance as the sector tends to perform best during periods of falling real rates. In essence, owning gold becomes less desirable if the risk-free rate of return after inflation increases.

A good example can be seen during the previous bear market in real rates as we saw the 10-year Treasury yield decline from 3.2% to 0.4% from October 2018 to March 2020. During this period, gold rallied from $1,200 to $1,600 and then went on to make new highs in the ensuing months of the coronavirus crisis.