Analysts are looking for more upside in gold
(Kitco News) - Bloomberg recently released an article outlining a bullish case for the yellow metal. In the article, the analysts look at inflation in comparison to real interest rates and some technical factors that could push up the price of the precious metal.
The article said, "gold may outperform the S&P 500 Index about 20% as the threat of stagflation becomes real.". It then went on to say, concerns over peak economic growth are coinciding with rising inflation, which pushed the real yield on Treasuries to record lows. The high correlation between the real yield and gold suggests bullion is undervalued. Trading signals based on 20-week moving averages imply a potential breakout rally over the next year.
Bloomberg also noted, it is that gold has a strong inverse relationship with the U.S. real interest rate, which has resumed its slide into negative territory since March. Gold prices and the real yield have an r*square of 0.91 on the regression model over the last five years and the red asterisk below the red line signals gold prices are undervalued for the current level of yield.
On the technical analysis side, the article takes us on a quick tour of Bollinger Bands, which plot lines above and below a simple moving average at a specified number of standard deviations to identify periods of high and low volatility. Currently, the weekly candle is breaking out of the upper trading band.
The bandwidth is about to widen from its lowest point since 2019 which created a so-called volatility squeeze. It suggests a significant increase in volatility ahead, potentially in favor of gold. And, as Bloomberg further notes, a trading strategy that follows the weekly crossover with a volatility squeeze has helped gold to beat S&P 500.
Historically speaking there have been five cases where gold crossed above its 20-week moving average with bandwidth below 6 over the past two decades. On average, bullion outperformed S&P 500 by 19% over the next 52 weeks with no loss record. The sixth signal is still counting. As Bloomberg concludes, "if this pattern repeats, gold is well primed to outshine S&P 500 next year."."
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