Gold Prices

Gold prices have been struggling for weeks. For five months, the precious metal has traded in sideways consolidation before the expected sell-off happened.

Short covering in gold was short-lived. Now, it’s near the support zone of $1,345. Some aspects work in favor of the precious metal.

The first aspect is inflation, something that has begun to gain momentum. Inflation and gold prices work hand in hand, after the dollar of course. Inflation has started gathering momentum after prices for crude oil spiked drastically. Until this moment, inflation was kept down by advanced economies by the manipulation of money and massive deficits.

The US consumer price index is at 2.8 percent. The primary contributor is the price of oil. However, these prices began accelerating from the beginning of this year. The inflation in the US has risen from the beginning of last year.

Treasury Yield at Various Year Amounts and Increase in Interest Rates

The second point is the interest rate which is low considering rising inflation. US 2-year Treasury yield is at 2.57 percent, the 5-year at 2.74 percent, and the 10-year at 2.84 percent. At 2.97 percent is the 30-year US Treasury yield.

Yield curves are quite flat now, with the 30-year yield delivering only 24 basis points over the 5-year return. It’s remarkable if one holds 30-year government bonds, they’re earning only .24 percent each year in comparison to 5-year debt.

If the rate of inflation is more than 2 percent, there’s the question of what incentive investors will receive in a return of 2.97 percent for 30 years. This phenomenon could lessen the demand for long-term debt in the US. The funds should eventually flow into other asset classes such as gold or equity.

The third reason is the lesser amount of room for the US Fed to increase interest rates. Gold investors tend to look forward. So far, the Fed has hiked seven times interest rate since the end of 2015.

The US central bank now has limited room as fund rates for the Fed now stand at 1.75 to 2 percent. The general NSE -0.12 percent consensus is that increases in rate should top at near 2.9 percent levels. All this means there is only room for four more hikes.

Even with multiple attempts, gold couldn’t break into new highs in April. Prices were even further suppressed after the Fed’s rate hike in June. But gold has recently become significantly oversold and is also trading just above its critical support.

The backdrop is still quite constructive for gold keeping in mind elevated inflation, a high gold to silver ratio, low-interest rates, and an overextended dollar among other factors. In the end, it seems that gold is near a significant bottom here. The metal should stabilize, rebound and perhaps even move substantially higher into and beyond year-end.