PREDICTING GOLD PRICING

Gordon T Long

Global Macro Research | Macro-Technical Analysis

STRATEGIC INVESTMENT INITIATIVES

HARD ASSETS – GOLD

PREDICTING GOLD PRICING (IN US DOLLARS).

In our previous newsletter we outlined the tenets of the correlation that has been in place since the 2008 Financial Crisis regarding the pricing of Gold. The chart directly below shows you the most recent pricing action in gold down to an hourly basis as further evidence of that correlation.

However, there is more to it than knowing that gold pricing is correlated with the 10Y UST Real Rate. The question then is, what controls the 10Y UST Real Rate? We previously illustrated that to be predominately for the last 10 years, the Chinese Credit Impulse. The question is – is that all we need to know? The answer is it is not quite that simple!

MACRO ANALYTICS - 03-04-21 - Coming Deflationary Tsunami - w/ Charles Hugh Smith

GOLD VERSUS 10Y UST REAL RATES

THE CHINESE CREDIT IMPULSE

The Chinese Credit Impulse has consistently lead the 10Y UST Real Rate by 12 months for over a decade (chart to the right)!

This correlation will give you a fairly good indication of what to expect regarding real 10Y UST rates.

It holds equally well for the longer dated 30Y UST Real Yield (shown to the right)

INFLATION BREAK-EVENS

Presently Inflation Break-evens are rapidly and alarmingly driving up the Nominal Value of the 10Y UST Yield to levels many consider potentially de-stabilizing to the highly leveraged financial markets.

Inflation is definitely a near term concern, however there is yet little evidence that this a secular concern. Deflationary pressures are more a concern in the intermediate to longer term. (View this month’s Macro Analytic video at bottom of this mailing)

US TREASURY REAL RATE

The US Treasury 10Y real rate has evolved to be accepted in the financial community to be equivalent to the US TIPS (Treasury Inflation Protected Securities) rate.

We have serious issues with it be represented as such because the TIPS is based on the flawed “CPI” Index. We lay out the issues of the flawed nature of the CPI associated with substitutions, hedonics and imputation in our 2017 Thesis paper “The Illusion of Debt”.

However, it is not a major impediment to this predictive tool discussion because we are using it as a short term relative benchmark. We will discuss the longer term ramifications further in the month’s upcoming LONGWave video.

The current Real Rate as represented by the 10Year Treasury Inflation Indexed Security Rate approximates 0.66%

FISHER’S EQUATION

Nominal Interest rate = Expected Inflation + Real Interest rate

KEY MIS-UNDERSTANDINGS IN THIS SIMPLE FORMULA:

BREAK-EVENS as a measure of domestic inflation moves the nominal rate. The Inflation Rate of the country does not move the real rate
REAL RATES are impacted by a shift in:
- The relative value of the currency,
- Global inflation pressures and
- Credit worthiness.
INTRINSIC VALUE: Falling Real Rates reflect a reduced intrinsic value of a Bond. Fisher’s Equation says this will result in a reduced Nominal Rate as the interest revenue stream is perceived to be of less value.
MONETIZATION: Rising domestic inflation, due tof the monetization of debt, will inevitably impact the domestic currency which then reduces the real rate, making nominal rates and their interest revenue stream worth less.

EXPECTATIONS

Our current expectations are for:

Break-Evens : Approaches 2.85%

Real Rates: Will approximate 1.0% to reflect the Chinese Credit Impulse

Correlation

Nominal Rates: Will peak at approximately 1.85%

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