August 4, 2020
We've been writing about this for months, but with so many generalists still pushing the opinion that gold only moves as an inverse to the U.S. dollar, it's time to write about it again.
As we often do, let's start with links to past articles on this topic so that you can get caught up and/or re-acquainted with the subject:
Real interest rates in the U.S. turned sharply lower on June 5 and the trend in COMEX gold has been toward higher highs ever since. These inflation-adjusted interest rates are now at all-time lows, so it's no coincidence that COMEX gold is at all-time highs. (Chart courtesy of ZeroHedge:)
Again, real interest rates are THE KEY DRIVER of gold prices over time. This has always been the case, and it will continue to be the case. Do not fall for the simplistic, generalist view that the price of gold simply moves inversely to the U.S. dollar. If that were the case, then the price of COMEX gold should be significantly lower.
The U.S. Dollar Index is currently trading at about 93.50, which is the lowest level since June of 2018. If the gold price was simply an inverse of the dollar, then why is it not trading at $1300...which is where it was trading in June of 2018?
The answer: Because changes to the relative value of the dollar only provide a tail or head wind for the gold price. See the chart below and look for any evidence of an everyday direct 1:1 correlation:
Instead, let's look for a correlation with real interest rates. The best available proxy for real interest rates on a daily basis is the ETF with the ticker symbol "TIP". This fund is a portfolio of U.S. Treasury Inflation Protected Securities or "TIPS". Simply put, when real rates are rising, the share price of the fund falls. When real rates are falling, the share price rises. Note that the share price has risen consistently since Friday, June 5. Note, too, that the price of COMEX gold has risen with it.
But the correlation is not something that just appeared over the past sixty days. Let's look at the same, five-year time horizon where we compared COMEX gold with the dollar. What do we find?
OK, so having proven that point, here's where it gets interesting...
The U.S. is about to plunge into a period of significant stagflation—like the 1970s, a time of low economic growth and significant price inflation. At the same time, the U.S. Federal Reserve is about to announce a major policy change of "allowing" inflation to exceed 2% while at the same time instituting a program of "Yield Curve Control" to keep interest rates low. See this most recent post of two weeks ago for more details:
Putting this all together, you can be assured that real interest rates are going to move even deeper into negative territory. In this podcast with Grant Williams, the respected analyst Russell Napier projects that the U.S. inflation rate is soon headed to 4%. Combine that with a 0.50% nominal rate on a 10-year U.S. treasury and you get a real rate of -3.5%!
Now scroll back up and notice that the current ALL-TIME LOWS for real rates in the U.S. are just below -1.0%...and COMEX gold is approaching $2000. Given the obvious and direct correlation with real rates, where do you think the gold price may be at -3.5%?
My point is this...
DO NOT let the know-nothing generalists and stockjobbers talk you out of your long-term positions. Of course prices will fluctuate, ebb, and flow as they always do...but the value of the U.S. dollar relative to other fiat currencies will only have a very small impact. Instead, sharply lower real interest rates will provide incentive for physical gold accumulation worldwide. THIS will drive prices higher in the weeks and months ahead. Failure to understand this CRITICAL point will cost you dearly as this bull market in the precious metals continues.