Too many technical analysts dismiss fundamentals. True, technicals usually lead fundamentals but understanding the fundamental drivers (when it comes to Gold) can give you an edge. Gold and gold stocks have remained below their 2016 peaks even in the face of a very weak US Dollar because the fundamentals are not there. Real rates have been stable in 2017 while the yield curve has been flattening. Until things change, Gold and gold stocks have little chance to breakout.
If you follow my work you know that there is a strong inverse correlation between the Gold price and real interest rates. Gold performs best when real rates are declining and especially when real rates decline while in negative territory. Real rates declined sharply into and during 2016 but have been rising or stable this year. The current problem for Gold is nominal yields have trended higher and faster than the rate of inflation.
In the chart below we plot Gold, the real 5-year yield (as calculated from the TIPS market) and the real Fed Funds Rate (rFFR). The US Treasury provides daily data of the real 5-year yield and we can see that it has trended higher since summer 2016 and is currently at its highest levels since Q1 2016. It has advanced nearly half a percent since its low a few months ago. Meanwhile, the rFFR has increased by more than 1% this year. That was after falling by nearly 2%.
This post was published at GoldSeek on 29 November 2017.