• 4 hours Bezos Is Heading To Space This Sunday
  • 3 days El Salvador’s Surprise Bitcoin Move
  • 6 days Markets Unfazed As Inflation Hits 13-Year High
  • 7 days How the Token Economy is Disrupting Financial Markets
  • 9 days FBI Investigating 100 Types Of Ransomware Attacks
  • 11 days Fed Ends Corporate Credit Emergency Lending Program
  • 13 days AMC Becomes the Latest Winning Meme Stock After GameStop
  • 14 days The Real Reason Your 401k Has Been Lagging
  • 15 days China Lifts Cap On Births, Allows Three Children Per Couple
  • 17 days The Market Is Ripe For Another GameStop Saga
  • 20 days Senate Grills Big Banks Over Pandemic Opportunism
  • 21 days Cannabis Has A Major Cash Problem
  • 22 days Ransomware Netted Criminals $350M In 2020 Alone
  • 23 days Russia Is Taking On Google
  • 24 days Chinese Regulators Deal Another Big Blow To Bitcoin
  • 25 days Ohio Residents Brave Vaccine for Chance To Win $1M
  • 27 days Inflation Is Coming. Are You Prepared?
  • 28 days Travel Might Get Another Supersonic Disruption
  • 29 days The World Is Running Out Of 6 Key Resources
  • 30 days $15/Hour Minimum Wage Might Happen Naturally
Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

Billionaires Are Pushing Art To New Limits

Billionaires Are Pushing Art To New Limits

Welcome to Art Basel: The…

  1. Home
  2. Markets
  3. Other

Will a Rising US Dollar Crush Gold's Fledgling Bull?

Gold and gold stocks have stabilized after forming a short-term low and even held up well while the US$ index pushed to an 8-month high. Conventional wisdom would tell us with the US$ index nearing a major breakout, Gold and gold stocks would be vulnerable to further losses. However, many astute analysts and traders believe that Gold and the US$ index can rise together and we note that the trend in the US$ index while important, is not the primary driver of Gold. Ultimately, as long as Gold's fundamental driver, declining or negative real rates remain in place, then the fledgling bull market will remain on track.

First, take a look at what I like to call my master chart for Gold's fundamentals. We plot Gold, the real fed funds rate and the real 5-year yield. We highlight the major bear markets in Gold which occurred when real rates were rising or were strongly positive. Since the middle of 2015 real rates have declined and that explains the sustained recovery in Gold this year.

Gold, Real Fed Funds rate and Real 5-Year Yield

Although the Federal Reserve could raise rates, inflation is ticking higher and recent market action argues that inflation and inflation expectations will rise into 2017. Inflation metrics such as the sticky CPI and core CPI are showing inflation well above 2% without higher energy prices which could be on the way in the months ahead. Oil closed the week at a 15-month high and in recent weeks surged above important moving averages such as the 200 and 400-day.

In other words, the potential coming rise in inflation figures to dwarf a measly quarter point rate hike. Recall the mid 2000s and the 1970s. Inflation rose faster than interest rates and so Gold performed well. The Fed raises rates when inflation rises but the Fed is almost certain to remain behind the curve and let inflation run. That is bullish for Gold in US$ terms, even if the US$ index is performing well.

Another thing to keep an eye on is Gold's performance against foreign currencies. Below we plot Gold priced in a number of different currencies and the corresponding 400-day moving average. Other than in Yen terms, Gold is in an uptrend against every major currency and remains above rising 400-day moving averages.

Gold in Various Currencies

Ultimately, the single most important driver of Gold is negative or declining real interest rates and with inflation poised to rise, real rates are likely to decline further in 2017. If the US$ index is rising then that certainly puts some cap on Gold's performance in US$ terms. However, the presence of negative real rates combined with continued outperformance in foreign currency terms would sustain the bull market. Moreover, precious metals already experienced a vicious multi-year bear market. You don't get that kind of buying opportunity twice but the recent correction in the sector has created a lower risk buying opportunity.

 


For professional guidance in riding the uptrend in Gold, consider learning more about our premium service including our favorite junior miners which we expect to outperform into 2017.

 

Back to homepage

Leave a comment

Leave a comment