Has gold formed a mid-term top? Industry insiders: Gold prices are in the early stages of a bull market
Gold is one of the main asset classes that has yielded positive returns so far this year. Gold is still in the early stages of a bull market, with quarterly returns at their highest since 2009. Recently in the US, the president of the Federal Reserve Bank of New York stated that it will take several years for the US economy to recover to pre-pandemic levels. Central banks will maintain low interest rates, and quantitative easing and bond purchases will continue for at least several years. One factor that everyone has not noticed is that inflationary pressures are building up due to the central banks' loose monetary policy. There is a negative correlation between gold prices and real yields (interest rates minus inflation).
Time:
2020-07-10 20:28
On Friday, July 10, during the European trading session, spot gold continued to hover near the 1800 mark, after profit-taking the previous day.
Tradebulls Securities' director wrote a brief analysis on the outlook for gold, the content is as follows:
Gold is one of the major asset classes that has yielded positive returns so far this year. The recent bull market still has room to rise, and many investors are asking what is driving the price up? The Covid-19 pandemic is one reason, but not the only one.
Gold is still in the early stages of a bull market, with quarterly returns the highest since 2009. The big question on everyone's mind is how much further gold can rise, and what will drive prices higher in the future.
If a Covid-19 vaccine becomes available, everyone expects a stock market rebound, and the gold market will correct. But importantly, even with a vaccine, the damage caused by Covid-19 in 4 months will take years to recover.
Recently in the United States, the New York Fed president said that it will take years for the US economy to recover to pre-pandemic levels.
Central banks will maintain low interest rates, quantitative easing and bond purchases will last for at least several years.
One factor that everyone hasn't noticed is that inflationary pressures are building up due to the central banks' loose monetary policy.
There is a negative correlation between gold prices and real yields (interest rates minus inflation). When real yields rise, gold falls, and vice versa.
When interest rates rise, real yields also rise, increasing the value of the dollar by making it a high-yielding asset, which is bad for gold, so gold prices fall.
But with lower real yields, investors will not give up any opportunity cost of holding gold, making the dollar an unattractive asset and pushing up gold prices.
We analyzed two real yields, the US 5-year and 10-year Treasury Inflation-Protected Securities (TIPS), which shows a close link between gold prices and inverse TIPS yields.
Since 2020, this correlation has strengthened - the correlation between gold and 10-year TIPS is 0.79, while it was 0.59 before 2020. A correlation coefficient of 1.0 indicates a perfect positive correlation.
Part of the reason for the increased correlation is that both interest rates and inflation rates have fallen due to the Covid-19 crisis.
The Fed is expected to keep interest rates low until 2022, by which time the market will be awash with money supply.
By cutting interest rates to near zero, buying government bonds, and also buying trillions of dollars of corporate bonds, the Fed has made it clear that this extremely dovish policy will last for a considerable period of time.
Apart from the surge from March 11 to March 24, 2020, when five-year TIPS jumped to 0.01 before falling back below zero, five-year TIPS have been negative for most of this year. Currently, five-year TIPS are -0.86, an eight-year low.
Given the record high in inverse real yields, this trend is very favorable for gold.
The future is uncertain, but given the downward pressure on real yields, it is too early to predict the end of the gold rally.
A medium-term top may have formed, but the $1825-1875 target is still not complete, and a significant upside is expected as extremely loose monetary policy will exacerbate inflation, while interest rates will be near zero, pushing TIPS further into negative territory.
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