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LAWRIE WILLIAMS: Gold's strong positive correlation with TIPS - Murenbeeld

Gold rose by around $50 over the past week, despite being subjected to substantial resistance to its upwards moves.  Seemingly it still gets taken down each time it gets anywhere near testing the $1,750 level – nowadays if it pokes its head above $1,740 it is very smartly brought back down again, but whether this is by HFT stops, or by those big money players keen to prevent the yellow metal rising out of control due to their big short positions – or a combination of the two – remains open to debate.  Suffice it to say that last week the gold price was brought down very sharply, for whatever reason and it took some very downbeat predictions from the latest U.S. FOMC meeting to hit equities hard and boost the gold price as investors began, at least, to see the light.

The gold price fell sharply again this morning.  Asian equities fell sharply overnight and European ones opened heavily down.  Whether this persists through the day remains to be seen, but we suspect U.S. equities may follow suit when markets open and the FOMC meeting deliberations are assessed further by the markets.  Coronavirus statistics in the U.S. are still far from showing any positive trends, the Black Lives Matter protest fallout, continues in major cities and the Trump anti-China rhetoric shows little sign of any reduction. Things thus look set fair for a continuation of the U.S. economic downturn which now looks likely to be far more prolonged than the optimists had been suggesting.

There almost certainly will be no V-shaped recovery and the current recession will likely continue to affect the U.S. and global economies for at least another year, and probably longer.  FOMC participants’ individual views on unemployment levels, for example, despite last week’s data suggesting a sharp jobs pick-up – but still leaving overall U.S. unemployment at an unacceptable level, even if the latest figures presented are correct – were far from positive for the economy.  The unemployment rate projected by the 17 FOMC participants individually ranged from 7.0–14.0% for 2020-Q4, 4.5–12.0% for 2021-Q4, and 4.0–8.0% for 2022-Q4.  This suggests no rapid economic recovery as far as the economists who make up the FOMC participants are predicting. 

Once the Q2 corporate profit (or loss) figures start coming in. then the elevated levels of the U.S. stock indexes for example will start looking horrendously high.  Some economic sectors will take years to recover, if they ever do.  Not only have these sectors been decimated economically, but will likely be hit longer term by subsequent lifestyle changes which will also adversely affect some parts of the economy (and maybe benefit others).  The equities crash of Thursday may thus just be the start of a stock prices collapse which could continue, on and off, for several months and likely drive investors seeking safety into gold and silver.

One of the newsletters I receive weekly is that from Vancouver Island-based Murenbeeld & Co.  Martin Murenbeeld, who gives his name to the firm is, in my opinion, one of the most realistic economists and gold-followers out there.  He is not one of the gold perma-bulls predicting hugely elevated gold prices, but a market realist who calls it as he sees it.  At the moment he feels gold is well positioned to rise significantly over the next several years – it will be interesting to see the update on his actual gold price forecasts which are due out next month.

Murenbeeld continues to demonstrate the gold price’s remarkably close correlation to the inverse of the 10-year TIPS (Treasury Inflation-Protected Securities) yield – see chart below – so by following the TIPS yield one should be able to get a good idea of where the gold price is headed:

Source: Murenbeeld & Co.

According to Investopedia, Treasury Inflation-Protected Security (TIPS) bonds are a type of Treasury security issued by the U.S. government that is indexed to inflation in order to protect investors from a decline in the purchasing power of their money. As inflation rises, TIPS adjust in price to maintain its real value.  The U.S. Treasury itself defines TIPS thus: a government-backed security that provides protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

The current 10 year TIPS yield is at -0.52%, the lowest level since June 2013, and seemingly declining further.  It was at its lowest of below -1% in 2012/13 when the gold price hit its record highs.  The current prediction from David Enna of is for the yield to fall further to around -0.65%, but if all the Fed and Government cash stimulus flooding the U.S. economy at the moment does lead to an inflationary spike, as many predict, then the -0.65% prediction could well be a conservative one.  Negative yields tend to be positive for the gold price and any further decline in the TIPS yields has to be extremely bullish for gold assuming the inverse correlation with the gold price persists.

15 Jun 2020 | Categories: Gold

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