We have been pointing to the second half of 2019 for the past 18 or so months saying there would be a shift in how gold and silver perform on the charts. We are now seeing that happen. Both metals may take a shallow dip back to $1,350 and perhaps will fall below that mark, but gold will not be denied at this point. Silver, on the other hand, has some work to do before we can say the same about where it’s headed.
Both metals for the past month have been riding high on all the bad news being treated as bad news. The final straw was the last Fed meeting, June 18 -19, 2019, combined with the oil tankers being fired upon on June 13, 2019. The button pushers chose not to overwhelm the charts when these two events took place so close together and allowed both metals to post upward moves.
Consider everything else that has happened just in the last six years since gold last broke the $1,350 mark. How much has the world changed? Obama is now Trump, BREXIT is close to being finalized, France, Italy, Spain, Greece, Austria are not alone in their desire to shut down the EU project and euro currency. Turkey is now siding with Russia and China instead of being a true NATO ally.
During the past six years we have also witnessed the national banks of Poland, Hungary and several other nations around the world begin regularly acquiring physical gold or re-entering the gold market a time or two to add to their holdings. This impressive list of gold and silver friendly headlines are the items I could easily pull from memory. This is to say nothing of the turmoil just around the corner with the 2020 election cycle beginning to come into view.
If we combine this with another impressive list of items that are both gold and silver friendly one would have to seriously reconsider their thinking about having at least a little gold and silver in physical form close at hand.
1. There’s no inflation to hedge against with gold: The yield on the 10-year U.S. Treasury note was at 2.0% on Friday, down from 3.24% on November 8, 2018 (Fig. 5). Over this same period, the comparable TIPS yield is down 86 basis points to 0.31%, one of the lowest rates since September 2017.
The spread between these two yields over that period is down 38 basis points to 1.69% (Fig. 6). This spread is widely considered to be a proxy for the fixed-income market’s outlook for the annual inflation rate over the next 10 years, so its narrowness suggests inflationary expectations remain low. If that’s the case, then why would the gold price be as strong as it is? After all, gold is widely viewed as a hedge against inflation.
Except there’s no inflation to worry about. Indeed, on Friday, we learned that the headline and core PCED inflation rates were just 1.5% and 1.6% year-over-year through May (Fig. 7). The core rate hit the Fed’s 2.0% target only six times since it was publicly set by the Fed at the start of 2012
2. Gold is getting TIPsy: The answer to why gold is rallying can be found in the fact that the gold price tends to be highly correlated with the inverse of the 10-year TIPS yield (Fig. 8). In other words, gold does best when the TIPS yield is falling. That makes sense, since both speculators and investors in gold have to pay for storing the metal somewhere. If the inflation-adjusted financing cost is going down, gold is cheaper to store.
3. Gold diverging from other commodities: In the past, I have often observed that the price of gold seems to confirm the underlying trend in the CRB raw industrials spot price index as well as its basic metals component (Fig. 9 and Fig. 10). However, the price of gold has been diverging from both of these indexes so far this year.
That’s an odd divergence. Is gold signaling that other commodity prices will soon be heading higher? That seems unlikely given the persistent weakness of the global economy. On the other hand, if the U.S. and China strike a trade deal, there could be a “peace dividend” for the global economy, which would boost global growth. In this scenario, the price of gold is likely to move lower. Source
Xi and Trump will slow walk a trade deal agreement and will be hard pressed to agree any time soon. It is very good for their political clout to continue the show. Why spoil the party that supports both politicians agendas’?
4. Copper-to-gold ratio coincides with bond yield: While the TIPS yield seems to drive the price of gold, it is interesting to see that the ratio of the price of copper to the price of gold has been highly correlated with the nominal 10-year U.S. Treasury yield (Fig. 11). The same can be said about the ratio of the CRB raw industrials spot price index to the price of gold versus the bond yield (Fig. 12).
This makes lots of sense, though causality runs both ways: A weaker (stronger) copper price signals a bullish (bearish) environment for the bond price leading to lower yields. A lower (higher) bond yield, led by the TIPS yield, tends to be bullish (bearish) for the gold price.
5. Gold is a hedge against economic and political instability: Gold is no longer an inflation hedge because inflation is no longer a problem. Instead, gold might be a hedge against weak economic growth. Why would weak growth be bullish for gold? Economic weakness tends to inflame destabilizing anti-globalization nationalistic political forces around the world; gold is a refuge from economic and political instability. Source
If this is not enough fuel for a bonfire I am not sure what is. I 100% disagree with anyone saying “there is no inflation“. Anyone that believes such nonsense or speaks such nonsense either doesn’t live in the U.S. or has an agenda. If you eat, use healthcare services of any kind, have insurance of any kind, pay taxes, have children in school or you yourself attend school and let’s not forget put gas / diesel in a vehicle, then you should be well aware there is plenty of inflation to support holding gold.
Gold and silver, in my opinion, have left the station and will be traveling to far-off reaches of the nether world. It is never too late to jump on board, it’s just a question of how costly the ticket will be once a person decides to jump aboard. Got physical gold and silver, close at hand?
