The recent trading pattern in gold is giving signs that investors are pricing in a possible ‘policy error’ as central banks around the world begin raising interest rates and a bull market may be just around the corner. Pepperstone head of research Chris Weston comments on the market and shares his forecasts for the gold price. we too cryptocoin.com We have compiled the master’s shares for our readers.
Gold price and real interest inverse correlation not working?
This week marked a two-month high as gold prices soared above $1,845. However, it is quite surprising that the yellow metal is able to make new gains against a backdrop of hawking central banks and rising US Treasury yields. Chris Weston, head of research, comments:
We’re not just talking about the increase in nominal Treasury rates, we’re talking about the increase in real Treasury rates. And these are Treasury bonds adjusted for inflation expectations. Generally, gold and interest rates move in an inverse correlation. If real interest rates rise, gold falls.
Gold has no returns. Therefore, gold becomes less attractive when interest rates climb in real terms. Chris Weston comments:
Since the beginning of the year, we’ve been seeing a really interesting dynamic where real interest rates have risen sharply, but the gold price has been doing really well.
“Gold is currently a hedge against policy error rather than inflation”
This is an important development that cannot be overlooked. Markets are pricing in at least four rate hikes this year as the Federal Reserve prepares to tackle four decades of high inflation in the US. But the gold market seems to be preparing for another policy mistake. Chris Weston explains his views as follows:
Gold is not currently an inflation hedge. A hedge against a policy error. Markets say we’re going to see four or five rate hikes this year, along with passive balance sheet flow. Does this mean we are closer to a policy error? I think that’s what you see in a gold market, if central banks have to step back, gold will definitely fly. This is a hedge you have in your portfolio against policy error.
The rise in crude oil prices also adds to this argument, as higher oil helps support gold. “Another nail will be driven into the coffin for the consumer. And as the demand increases, we will be talking about $100 oil,” said the master, and continues his assessment as follows:
This will feed gold due to interest pricing. If central banks increase it by the prescribed amount, would we want a 10% allocation in the portfolio for gold and silver? This is exactly what you see on the market. That’s why it broke away from nominal and real interest rates and people are saying let’s take action against a policy mistake.
Chris Weston: Gold price will skyrocket if policy mistake is made
As the gold price continues to make a series of higher lows, Chris Weston states that the next big move could come once the precious metal hits $1,850:
If we reach $1,850 in the coming weeks then we will start to see a bullish trend going forward. If we see this thesis of the market that we can make a policy mistake and we need to guard against it, gold will continue to be in demand and the gold price will skyrocket. This could be where the next bull market in gold comes in.
According to the veteran name, a sign to watch is a rally of gold in every currency. Chris Weston opens his thoughts this way:
That’s when you realize that people are looking for gold itself, and it’s not just a currency effect.
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