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Old 07-04-2020, 15:36
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Default Re: Tickmill UK Fundamental Analysis

Is it Late to go Long in Gold? Real Interest Rate Path in the US Suggests “no”

The first signs of consistency appear in the decrease of the number of confirmed cases of Covid-19. The whole near-term market optimism hinges on that trend so it’s worth to keep a watchful eye on it. Following the abrupt daily drop in the number of new cases from peak 98135 to 75956 on April 5, it fell the second day in a row to 68608, extending relief rally in world stock markets today:

Asian stocks have ended session in green, key European indices advanced by an average of 5%. US stock index futures have been also trading higher on Tuesday. Thanks to upbeat sentiments in the oil market, it is very likely that the bullish momentum in EM including Russia will be extended for the rest of today’s trading session. The ruble is expected to continue to strengthen with the main goal of 75 rubles per dollar, passing intermediate support without much effort.

Some questions are caused by the rise of gold coexisting with the rally of stocks which are considered to be the asset classes reacting to opposite market sentiments. But taking a look at the dynamics of TIPS yield (yield on inflation-protected treasury bonds), we can see that the real interest rate in the US seems to play a big role in gold pricing currently:

The real interest rate (nominal rate minus expected inflation) and gold are inversely related, since the decrease in the first reflects the deterioration of investment alternatives in the economy and decrease in the purchasing power of money (inflation), while gold serves as protection for all of this.

The nominal interest rate is likely to linger for longer near the zero level due to cautious Fed unwilling to touch the interest rate, while enormous fiscal incentives from the government should have strong inflationary effect (due to the fact that the money will also fall into the hands of the poor which have much higher propensity to consume). The real interest rate will probably decrease further and based on the dependence above, the likelihood of gold extending the rally is pretty high, making it attractive medium-term bet.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

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