Can Gold Price Rise Without a Rate Cut? / Commodities / Gold & Silver 2019
The downside potential in precious metalsdiscussed last week is playing out as Gold and gold stocks have broken downtechnically.
The global economy appears to be firming andthat is evidenced by a sustained rebound in global equity markets.
As a result, the potential for a rate cutwhich pushed precious metals higher is now unwinding. That has caused thebreakdown in precious metals and there is more unwinding to go.
We have trumpeted the need (in preciousmetals) for a rate cut as a fundamental catalyst for the next bull market. Butthere is another scenario that plays well for Gold.
Let’s step back for a second and remember thatGold is driven by declining real interest rates and secondarily, a steepeningyield curve. Either essentially entails Fed rate cuts or inflation risingfaster than short-term rates which in other words equates to rising inflationexpectations.
In the chart below we plot Gold along with anumber of fundamental indicators for Gold. These include the real 5-year TIPSyield (as calculated from the TIPS market), the real 5-year yield, the real fedfunds rate and the yield curve (upside down).
If the Federal Reserve is not cutting rates inthe next 12 months then the best case scenario for Gold would be a bump ininflation that leads to a material decline in real interest rates and asteepening of the yield curve.
The CPI is rebounding and if it were to reach3% while the Fed stands pat, that would equate to a real Fed Funds rate of-1.6%. That would imply a decline of -2.1% from here.
Gold would definitely rally in that scenariobut for now, the market is focused on the declining expectations for a rate cutin the next 12 months. Until the unwinding of that trade is complete, Gold islikely to trade lower.
However, the point is that we should not bebearish for long if inflation indicators and inflation expectations increase ina sustained fashion. That equates to falling real interest rates which isbullish for Gold.
The CPI may ultimately need to exceed 3% oreven 4% to spring a huge breakout in Gold, but a return to 3% with the Fedremaining paused could push Gold back to the wall of resistance.
The gold stocks are extremely oversold on ashort-term basis and a rally should begin within the next day or two. Thatbeing said, the path of least resistance is lower until the market shifts itsfocus from a rate cut to rising inflation. That will take some time.
The months ahead could be an especially opportune timeto position yourself in this sector. We will be looking for anything we missedin recent months that gives us a second chance opportunity.
To learn what stocks we are buying and have 3x to 5x potential, consider learning more about our premium service.
Good Luck!
Bio: Jordan Roy-Byrne, CMT is a Chartered Market Technician, a member of the Market Technicians Association and from 2010-2014 an official contributor to the CME Group, the largest futures exchange in the world. He is the publisher and editor of TheDailyGold Premium, a publication which emphaszies market timing and stock selection for the sophisticated investor. Jordan's work has been featured in CNBC, Barrons, Financial Times Alphaville, and his editorials are regularly published in 321gold, Gold-Eagle, FinancialSense, GoldSeek, Kitco and Yahoo Finance. He is quoted regularly in Barrons. Jordan was a speaker at PDAC 2012, the largest mining conference in the world.
Jordan Roy-Byrne Archive |
© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.