Gold Prices 'Break Link' to Real Rates But 'Correction Looms'

GOLD PRICES erased last week’s drop against the Dollar in Asian and London trade Tuesday, rising to $1337 per ounce even as the US currency held firm on the FX market.
World stock markets followed Wall Street higher to new all-time records after the Senate ended the 3-day government shutdown by extending 2017’s budget for another 2 weeks.
Commodity prices also rose, and major government bonds recovered some of 2018’s sell-off so far, after the International Monetary Fund hiked its global economic growth forecast to 3.9% per year, the fastest since gold prices hit their current all-time high above $1900 per ounce in 2011.
Top 2 gold consumer nations China and India will see GDP growth of 6.8% and 7.4% respectively, the IMF said.
The Rupee edged closer to last week’s near 2-year highs against the Dollar on Tuesday, but the Yuan eased back and the Euro held 1 cent below its jump to 3-year highs.
Silver failed to track gold prices higher, dipping once more below $17 per ounce.
Platinum prices held at $993 having been “dumped through $1000” in Monday’s New York trade (as one bullion desk puts it) to erase all of last week’s 2.5% gain versus the Dollar.
“January has seen gold extend its late 2017 gains and we now think the price has done too much too soon,” says a note from the Commodities Strategy team at Chinese-owned London clearing and market-making bullion bank ICBC Standard.
“Gold has diverged from its multi-year correlation with US real rates, and even if one believes that we are entering a new market paradigm as global QE begins to be wound down, the risk of a correction is plain to see.”
Adjusted by market-based inflation forecasts, last week’s drop in US Treasury bond prices saw 5-year yields rise to their highest level since July 2009, offering a real rate of 0.33% per annum.
Gold prices then traded $400 per ounce lower than today.
Chart of 5-over-5 US T-bond yields vs. Dollar gold price. Source: St.Louis Fed
On a 52-week basis, the rolling weekly correlation of gold prices with real 5-year T-bond yields has averaged -0.35 since the start of 2003, with a median reading of -0.45.
That correlation would read -1.0 if gold moved perfectly inverse to real 5-year yields.
The correlation rose last Friday to +0.21, its highest reading since August 2014.
“Surging equity markets, a rise in interest rates across the curve, a stabilizing USD after a steep drop and technical resistance have likely prompted traders to relax some of their enthusiasm for the yellow metal,” says the latest weekly note from Bart Melek at Canadian brokerage TD Securities.
“Considering that investors have taken very hefty long bets on gold of late, it should not be particularly surprising that the yellow metal is consolidating below the highs.”
However, both ICBC Standard and Melek – winner of 2017’s LBMA gold price forecasting competition – predict stronger gold prices in 2018 as a whole.
“US inflation will continue to undershoot the Fed’s forecasts,” reckons ICBC, denting “its pace of rate normalisation [to] allow gold prices to trend incrementally higher.”
“Any economic weakness or an equity correction could well see gold move to [last September’s high at] $1357 rather quickly,” says Melek at TD.
“We suspect that such a catalyst will arrive, but it may take until next quarter.”


This publication is for education purposes only and should not be considered either general of personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, past performance is not necessarily indicative of future performance. This report was produced in conjunction with ABC Bullion NSW.

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