Key Gold Correlation Is Back! / Commodities / Gold and Silver 2018

It’s back.The crucial correlation returned to the goldmarket. Does it herald important shifts in trends?

RealInterest Rates Are Back in Town
One of the biggest developments in the gold marketduring the first four months of 2018 was the breakdown of the traditionalnegative correlation between realinterest rates and the price of bullion. As one can see in the chart below, the priceof gold was uncorrelated or even moved in tandem with long-term,inflation-indexed U.S. Treasury yields in Q1 2018.

Chart 1: Price of gold(yellow line, left axis, P.M. London Fix) and U.S. realinterest rates (red line, right axis, yields on 10-year TreasuryInflation-Indexed Security) in 2018.

However, thecorrelation has recently turned negative again. This is why we warned ourReaders in the latest edition of the MarketOverview: “if theold relationship comes back again, the price of gold may go south.” We arguedthat the weak U.S. dollar supported bulls, despiterising interest rates. But we cautioned investors that “at some point, the greenback mayrebound – and then, the negative relationship between the U.S. real interestrates and the price of gold may return.” Thisis exactly what happened. The greenback has broken out of its downward spiral and the negative correlationbetween the yellow metal and real interest rates reestablished itself. Inconsequence, the price of gold declined in mid-April.

What’s Nextfor Dollar?
Now, the question arises: what’s next? If the rally inthe U.S. dollar continues, gold will come under sustained pressure. However,investors shouldn’t be deceived by the recent greenback’s rise. Surely, risinginterest rates and the hawkish Fed support theU.S. dollar. Indeed, yield differentials favor continued strength in the dollarversus the euro, i.e., the biggest component of the U.S. Dollar Index. But thatwas also the case last year, and the greenback fell despite the widening divergence in interestrates in the U.S. and in the Eurozone.

You see, international and domestic politics operatein favor of the dollar. The U.S. – or at least President Trump – wants a weakergreenback. The Fed alsoprefers to have a weaker currency, to get inflation in linewith the target. We mean here that the U.S. fiscal, foreignand trade policies are shrouded in uncertainty, which puts the Americancurrency under pressure. Not to mention rising fiscaldeficits. The recent U.S. withdrawal fromthe 2015 international nuclear deal with Iran and new sanctions also increaseuncertainty, adding to the bearish side of the greenback and the bullish sideof the shiny metal. In the February edition of the Market Overview, we showedthat unpredictable and clumsy foreignpolicy of the new administration deteriorates the perception of the U.S. as areliable ally, which reduces the dollar’s value.

Implicationsfor Gold
And what does it all mean for the gold market? Well,last week the U.S. dollar retreated from its 2018 peak. It seems that thegreenback’s run may be out of steam. Although the interest rate differentialsupports dollar (and investors shouldn’t neglect this fact), other factors,including the political landscape, are rather bearish for the greenback. Themixed balance may cause gold to remain in a relatively narrow trading range, atleast unless its fundamentals or sentiment change radically.

However, the weak rebound in gold prices last weeksuggests that gold has some work to doon the downside. Similarly, the fundamental outlook is rather bearish inthe medium term, at least more bearish than a few weeks ago. We mean here thatthe stock market correction has notturned into a crisis and the risk appetite has increased. The worries abouttrade wars have diminished, while inflation remains in check. If interest ratescontinue their upward move and their correlation with gold returns, the yellowmetal will get into hot water. Stay tuned!

If you enjoyed the above analysis and would you like to knowmore about the gold ETFs and their impact on gold price, we invite you to readthe April MarketOverview report. If you're interested in the detailed price analysis andprice projections with targets, we invite you to sign up for our Gold & SilverTrading Alerts . If you're not ready to subscribe at this time, we inviteyou to sign up for our goldnewsletter and stay up-to-date with our latest free articles. It's freeand you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

Disclaimer

All essays, research and information found aboverepresent analyses and opinions of Przemyslaw Radomski, CFA and SunshineProfits' associates only. As such, it may prove wrong and be a subject tochange without notice. Opinions and analyses were based on data available toauthors of respective essays at the time of writing. Although the informationprovided above is based on careful research and sources that are believed to beaccurate, Przemyslaw Radomski, CFA and his associates do not guarantee theaccuracy or thoroughness of the data or information reported. The opinionspublished above are neither an offer nor a recommendation to purchase or sell anysecurities. Mr. Radomski is not a Registered Securities Advisor. By readingPrzemyslaw Radomski's, CFA reports you fully agree that he will not be heldresponsible or liable for any decisions you make regarding any informationprovided in these reports. Investing, trading and speculation in any financialmarkets may involve high risk of loss. Przemyslaw Radomski, CFA, SunshineProfits' employees and affiliates as well as members of their families may havea short or long position in any securities, including those mentioned in any ofthe reports or essays, and may make additional purchases and/or sales of thosesecurities without notice.

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.