Gold Price: The Goal Is $1,000
London (Feb 4) It appears the gold market is clearly not bullish now. Instead, there's a correction in conditions of the downward trend. And, probably, by the end of this year the price of gold will approach the level of $1,000.
Historically, the price of gold is most strongly correlated with the bond yield. Although, as I outlined in the previous post, the price of gold is also influenced by other factors. The influence of bond yield has recently reached unprecedented levels.
Let's take a look at the dynamics of the 120-day rolling correlation between gold and the 10-Year Treasury Yield since 2007:
It may be noted that until 2016 the nature of the correlation between gold and yields was changing and cyclical, remaining negative at the average. But since the beginning of 2016, the situation became unique. Namely, from mid-2016, the average correlation between gold and the 10-Year Treasury Yield was - 0.86 without significant volatility. And since the beginning of 2017 correlation is at the level of -0.95. In fact, the price of gold is now literally linearly depends on the bond yield, which is reflected by the following formula:
Gold = 1579.916 - 10-Year Treasury Yield * 165.797
It is interesting to note that if we evaluate how fair is the current gold price based on the proposed formula and taking into account the current bond yield, it may be noted that the actual gold price exceeds the predicted level by more than two standard deviations.
So, all the above boils down to one thing: in order to predict the price of gold, you need to predict bond yield. And in my opinion, there is every reason to expect that by the end of this year, the 10-Year Treasury Yield will reach 3.5%, and Mr. Trump and Mrs. Yellen will take of it (by the way, if you place this yield in my formula, the price of gold will equal $1,000).
Starting with 1980, the US monetary policy was gradually becoming softer until this process reached its logical conclusion in 2009, when the interest rate dropped to virtually zero. Naturally, the bond yield was declining in parallel. From 2015, the FRS began the new era by announcing the gradual tightening of the monetary policy, and three rises of the interest rate are planned for this year. This is the first reason why you shouldn't to expect the negative dynamics of the bond yield in the medium term.
The Obama administration, almost throughout two presidential terms, was engaged with ensuring budgetary consolidation. Trump promises to do diametrically opposite. Tax cuts, infrastructure projects and deregulation in conditions approaching full employment will boost real economic activity and inevitably will accelerate inflation. If Trump begins to impose customs duties on imported goods, this will have an additional impact on inflation. As a result, it is very likely that the FRS will even have to accelerate the tightening of the monetary policy. As a result, the 10-year US bonds yields could rise from 2.5% to 3.5% and even higher.
I do not fully understand why the gold price and bond yield are currently so strongly interrelated, and I'll be happy to find a hint in the comments. But this relationship is now stronger than ever. Against this backdrop, in view of the obvious growth prospects of bond yield, I believe there is just no reason to say that the gold price will increase.
Source: SeekingAlpha
