"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Sunday, May 4, 2014

U S Interest Rates Driving Gold Price ( along with Ukraine )

Sorting out the movements in the price of gold recently has been like guessing at the weather forecast. Geopolitical concerns, ( Ukraine ) are keeping a firm bid underneath gold as safe haven buying is focused on the potential for further escalations in those simmering tensions. Other factors are working to pressure it lower.

Having said this, I do want to post up a chart for those who are traders and are tracking fundamental factors driving the price of the metal.

I have mentioned many times now that I am of the view that US interest rates, and more accurately, interest rate outlooks, are either providing support to the metal or are working to add to headwinds.

Look at the chart below in which a comparison is made to the yield on the Ten Year Treasury Note and to the gold price over at the Comex  ( RED LINE ).

Go back to November of last year and notice that as the yield on the Ten Year rose, gold headed lower. When the yield on the Ten Year fell, gold tended to rise. The relationship had not been that close prior to November. If you look at the July - mid-October time frame, you can see that the two markets tended to actually rise and fall in harmony for a while.

Clearly in November the market shifted in its perceptions and began looking at interest rates more closely in determining whether or not to allocate capital into gold. For nearly three months, the markets moved in a near perfect inverse manner.

In early February of this year, that began to change  and while the yield on the Ten Year moved sideways, gold prices rose. Then in mid-March interest rates began to rise and gold prices resumed their inverse relationship and moved lower once again. In early April, Ukranian events erupted and that brought about a safe haven bid into bonds knocking interest rates lower. Gold responded by moving higher. Then as fears subsided interest rates moved back up again and gold moved lower. So far in May, interest rates have continued moving lower as safe haven plays are still around due to Ukraine and gold has moved back above $1300 as a result.

Here is my point in all this - the wild card for gold prices at this time are the events in Ukraine. As long as investors are worried over events there, interest rates are going to stay low due to safe haven flows pushing bond prices higher and thus interest rates lower.

If Ukraine events do subside ( and right now that does not seem to be the immediate case ) I would look for interest rates to start rising again meaning that gold will come under renewed selling pressure.

Here is the takeaway from all this - as long as US interest rates stay subdued, the US Dollar is going to have trouble rallying and that should tend to support the gold price. Take away any safe haven buying for any reason, and rising interest rates should bring a bid into the US Dollar and that will pressure the metal.

What do we get next? Who knows? The truth is no one does. Remember that when the predictions start up again. The market's opinion is the only one that matters.