Over the past 3 weeks, gold has perked up, rocketing nearly $100 per ounce. But is gold “ready” for its next leg higher?
Like it or not, gold has been in a downward trend for over a year…
Lower highs have come with lower lows, leading to 12 months of falling prices.
Right now, the $1700-$1750 per ounce level remains a key short-term area of support for gold.
You’ll see that after its recent rise, prices are right smack into the resistance trendline.
But to truly understand if gold is ready to go higher, one must look deeper than support and resistance.
War of the Words: “Transitory” Inflation and Gold
As I have mentioned many times, we are in an era of quantum economics with ultra-low interest rates and a strong US Dollar.
Blame it on the global supply chain, Central Bankers, or politicians, inflation has been running hot.
Regardless of whether this is “transient” or here to stay, it is making investors and the US Federal Reserve, uncomfortable.
In my book, The Rise of America, I discussed a phrase I coined called “CrossFlation” and that is exactly what has been playing out.
So, what does the U.S. Fed really think?
I think if you got a few glasses of vino into Jerome Powell off-camera…
He would admit that they have underestimated the supply chain issues which are a key root in today’s inflationary pressures.
I don’t have a crystal ball for inflation, and neither does the Federal Reserve…
But what I do know is that gold and commodities have the potential to perform very well in an inflationary environment. Let’s look into why this is the case.
The Consumer Price Index (CPI), which many uses as a barometer for inflation continue to soar.
The Fed’s preferred measure of Core-Personal Consumption Expenditures (PCE) while a lower absolute number also shows rising costs across the economy.
Rising prices combined with near-zero interest rates create a “negative yield” in real terms.
Today “real” yields are -1.14%, within striking distance of all-time lows.
Real Yields and Gold
There is a simple yet very powerful relationship between real bond yields and gold (more on that here).
Gold has a storage cost, bonds have virtually no holding cost. So, if both are safe, you’d pick the one with the free storage cost.
However, when bond yields are negative like they are today, bonds now have a “storage cost” which is higher than gold’s storage costs.
You can see in the chart below the powerful relationship that is exemplified. If real yields stay low or go lower, there is a strong supporting case for gold.
Gold Stocks are Up, But Well Below 52-Week Highs
The prices for gold equities are rising…
And miner-focused ETFs are up double digits the past month – while the number of companies trading close to their 52-week low has plummeted.
This is a simple sentiment indicator that I like to keep on my radar.
#goldstocks #goldprice #inflation
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