There is inverse relationship between bond yields and Gold prices. Whenever bond yield increases investment flow towards fixed income assets rises and brings down Gold prices. But bond yields get directly affected by inflation rate. If inflation is more than bond yields the real interest rate will become negative that will boost up gold demand. But if real interest rate is positive demand for precious metal may fall.
In India 10 years bond yield is 8.64 while WPI and CPI are at 6.16% and 9.87 % respectively. WPI is considered as the measure of inflation in India. That makes real interest rate 2.48%. Positive real interest rate is likely to bring down gold prices in Indian market. It is also in talk that CPI may also be considered as an important measure of inflation. Then the real interest rate will become negative 1.23% that may draw more investment in precious metals but Reserve Bank of India may increase interest rate before considering WPI as an important gauge.
Let look at the historical relationship between bond yields and Gold prices through the chart of last 10 years performance.
Till the end of 2008 there was little positive correlation between Gold prices and India Govt Bond Yields but after that there was negative correlation till the mid of 2013. Again we can see the positive correlation between these two assets.
Positive correlation occurs because there are also other factors like currency movement, supply and demand, global markets etc which are affecting Gold prices. When the domestic currency gets stronger investment flow in risky assets increases this leads to fall in demand for precious metals. Short supply or high demand changes the price direction of any commodity. Global economies are interrelated and prices change gets transferred from major producing countries of such commodity to all its trading partners.
We may see high demand of Gold from emerging economies if their inflation rate is high making real interest rate near to negative. That why these economies are Gold hungry.