The Bias for Gold is Now Down

Recently, we pointed out that, since the beginning of the year, gold had stopped correlating normally with interest rates and inflation expectations, but that it had recently returned to its normal correlations with these markets. At that time, we also warned that if gold was to drop below its recent trading boundary of $1300, that a new down-trend would be established in gold. In this article, we will show that the newly re-established correlations continue intact and, now that gold has breached its support, it is vulnerable to a 10%-20% drop in price.

Inflation Expectations

Gold has maintained its recently recovered positive correlation with inflation expectations (as measured by TIP). The last time that the gold-inflation correlation went negative was in August of 2016, and as the correlation returned to normal, gold suffered a $200 drop. Now that the gold-inflation correlation has returned to normal, and gold has broken support, there is an increased chance that gold will experience a 10%-20% drop in price, just like it did in the latter half of 2016 (chart below).

Interest Rates and the Dollar

Recently, the dollar has re-established its positive correlation to interest rates, and gold has followed suit by re-establishing its normal negative correlation to interest rates as well. Since there is an up-side bias in both rates and the dollar, gold’s negative correlation to these markets makes is likely that gold will experience down-side price pressure (charts below).

In conclusion, the return of normal positive correlation between gold and inflation expectations, and normal negative correlation between gold and Treasury rates, and the price break below $1300, makes it highly probable that gold will experience a significant move lower in price over the next days and, perhaps, weeks.

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Source: Nicholas Gomez