The gold price recovery appears to have stalled and investors are asking if the yellow metal is poised for another sell-off.
Rising bond yields triggered the drop in the safe haven asset since last August when it hit a record high of over US$2,000 an ounce.
Unlike government bonds, holding gold doesn't pay you a regular distribution. As yields rise, the appeal for bonds increases over gold.
ASX gold shares following gold on a roller coaster ride
This largely explains why the gold price slumped to a low of around US$1,684 an ounce at the end of March 2021.
However, the commodity has since rebounded 13% although it remains stuck at around US$1,900 an ounce.
In the meantime, the fortunes of the Newcrest Mining Ltd (ASX: NCM) share price, Evolution Mining Ltd (ASX: EVN) share price and Northern Star Resources Ltd (ASX: NST) have fallen and risen along with gold.
Is the gold price overvalued?
What gold does next really depend on what happens to the United States, according to the analysts at Macquarie Group Ltd (ASX: MQG).
Future inflation expectations, measured by breakevens, suggest that the gold price is overvalued, but that's only half the story.
Breakevens are the difference between nominal US Treasuries and Treasury Inflation-Protected Securities (TIPS).
"The strength of the US economic recovery, coupled with rising inflation, has been sufficient to lift 10y inflation breakevens to ~2.5%," said Macquarie.
"However, inflation's likely transitory nature, a supply constrained labour market recovery, and the Fed's commitment to data rather than forecast dependence mean that 10y Treasury yields have stalled around 1.6%.
"Consequently pushing 10y TIPS yields back towards -90bps. Our team believe that Gold is trading ~$150/oz "rich" to currently depressed 10y TIPS yields."
Gold shines in US dollar's fall
But gold isn't as expensive as that suggests. The weakening US dollar is an offsetting factor and Macquarie's strategists believe the weakness will persist through to the September quarter.
"As a result, gold is only ~$80/oz above our cross-asset fair value estimate," said Macquarie.
"The core question, in our view, is therefore the pace of the US service sector reopening and its feed through to the labour market, as the key determinant of when the Fed starts to openly 'talk about tapering'."
ASX gold shares to buy now
Regardless of the near-term gyrations in the gold price, Macquarie is urging investors to buy the Northern Star share price.
The broker is excited about the gold miner after it attended a site visit to its KCGM gold operation.
"The recent reserves and resources upgrades were dominated by KCGM, which accounted for 83% of the reserve and 89% of the group resource increase," added the broker.
"The geological potential of the asset remains strong, with a large resource to reserve conversion opportunity."
Macquarie has an "outperform" recommendation on the Northern Star share price with a 12-month price target of $13.30 a share.
