Gold on the Move

Since bottoming on December 11, 2017 at $1242, gold has tacked on nearly $100 to its price. What’s going on?

Clearly, one reason for the move in gold is the weakness in the U.S. dollar. The black line tracks the U.S. dollar index over the past two months while the gold line tracks the gold price. The dollar hit its recent high exactly when gold reached its low and the two have diverged since then.

12. chart1

The weakness in the dollar appears to reflect a longer term trend going back to the mid-1980s as the chart below indicates. The downtrend was broken in 2015 but this now looks like a temporary departure from a gradual deterioration in its value against other currencies.

12. chart 2

The other significant development in the past two months is that gold is beginning to trend in the same direction as long term interest rates. The rates have begun rising, probably because of growing concerns about the return of inflation. The chart below tracks the yield on the U.S. 10 year Treasury note while the gold line represents the gold price. As you can see, they are moving together in lock step.

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The chart below is the Pring index of inflation expectations (the black line), also over the last two months. The gold line is the gold price. Once again, they track each other closely since the bottom in gold.

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What does all this mean? It looks to us as if the gold price has turned upward based on U.S. dollar weakness driven by rising inflation expectations. The key is increasing long term interest rates which now appear to favour gold after several years of the exact opposite relationship. When these key relationships change, it’s time to pay attention.

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