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posted on 04 July 2017

Gold, Real Interest Rates, Inflation, And Outlook

by Brad Parkes

Back on June 5, 2017 I wrote a piece on how I thought the break out of gold above its 5 year down trend would likely be a bear trap. You can review the article here. My reasoning was as follows:

  1. Mining stocks were underperforming gold.
  2. Smaller miners were underperforming larger miners.
  3. Large speculators were still quite long futures.

gold.bugs


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In addition I was getting a lot of promotional emails from the gold bugs. Since that date gold has declined from $1300 /oz to $1220/oz and it looks as if large Head and Shoulders Top has just broken down. This targets $1140/oz.

CME Group

Now that I am done patting myself on the back and taking a little victory lap, let us review my reasoning.

1.Mining Stocks are still underperforming gold. Both Senior and Junior gold mining stocks have underperformed gold.

Charts Courtesy of Stockcharts.com

2.Small miners are still underperforming the large miners.

Chart Courtesy of Stockcharts.com

3.Large Speculators are still long too many futures.

CME Group

None of the reasoning I had last month on why gold would not break out has changed. Next let us review reasons why I expect the H&S top to fulfill the chart prediction.

1.Real rates have risen.

Richmond Fed

This is due to inflation declining as the year over year price of oil is negative. Real interest rates = nominal interest rates minus inflation. The FED hiked rates so the interest rate part of the calculation has increased.

2. Inflation is declining. The inflation part of the real interest rate calculation has declined.

Philadelphia Fed

3.Gold is outperforming Silver. The ratio has not hit a blow off top, which would be a good entry point. If the gold silver ratio peaked at the 2016 bottom for precious metals it would equate to $1120/oz, however, I do not expect the ratio to get that extended. I expect a lower peak than early 2016.

Chart Courtesy of Stockcharts.com

4. Dow to Gold ratio is still in an uptrend.

Chart of the Day

5. Gold is overpriced versus beer. This chart is silly, it was published in the annual In Gold we Trust Report. However, it was used to suggest gold was underpriced, but looking at the chart, the gold market bottoms have been below the long run average and not above, as it is now. To me this chart suggests the bear market starting in 2011 has not ended and that gold may have to return to around $1000/oz before that could happen.

Incrementum

And finally

6. When you see headlines like this coming from gold bugs…

“WILL GOLD REACH $2.6 MILLION OR JUST $150,000"

Matternhorn Asset Management - June 15, 2017

RUN! or at least go short.


Author's note:

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This article appeared originally at Economisms 03 July 2017.

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