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Below are the four most important factors that influence the price of gold
indicators….If you understand and correctly interpret these four indicators, I guarantee you’ll make more intelligent buy/sell decisions. More importantly, you’ll make more profitable ones as well.
So writes Steve Mauzy (www.wyattresearch.com) in edited excerpts from his original article* entitled What These 4 Important Indicators Say About Gold.
[The following article is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Mauzy goes on to say in further edited excerpts:
I’m convinced most people fail to buy and sell gold intelligently because most people are unclear on what influences the gold price. Today, the haze will be cleared. Below are 4 such indicators and what they are saying about the price of gold these days.
1. Interest Rates
The price of gold moves inversely with interest rates. Interest rates rise, the gold price falls and vice versa.
Let me clarify, however, that the gold price moves inversely with real interest rates, which is the nominal interest rate (the quoted rate) less the expected inflation rate. For example, if someone pays you 3% on a 10-year bond, that’s the nominal rate. To get the real rate, subtract the expected inflation rate, which IS NOT the consumer price index most people use. The inflation rate is the expected growth rate of the money supply. Therefore, if we expect the money supply – currency, coin, checking accounts and small and large savings accounts – to grow 2%, we know the real interest rate is 1% (3% minus 2%).
Remember, don’t focus on the nominal rate, as it will lead you astray. Focus on the real interest rate.
2. The Yield Curve
The difference between long-term and short-term interest rates will also indicate where gold is heading. A rising yield curve is generally bullish for gold, and a flattening (or inverted) yield curve is generally bearish.
A rising trend in long-term interest rates relative to short-term interest rates indicates either falling market liquidity (associated with increasing risk aversion and a flight to safety) or rising inflation expectations, both of which are bullish for gold.
On the other hand, an inverted yield curve – short-term rates higher than long-term rates – is bearish. Investors expect the Federal Reserve will loosen monetary policy, making riskier investments like stocks more appealing.
3. Credit Spreads
Credit spreads – the difference between interest rates on high-quality and low-quality debt securities – might be the most potent of the four indicators. The gold price tends to do relatively well when credit spreads are widening and relatively poorly when credit spreads are contracting.
When the spread between a U.S. Treasury bond and junk bonds (rated BB or less) widens, the gold price tends to rise. In this scenario, the market is perceived as more risk averse and, because gold is a haven, its price rises. On the other side of the coin, gold prices tend to fall when the spread contracts.
4. The Retail Buyer
This is the most subjective of the indicators. Here, I measure the amount of interest retail buyers and sellers are giving gold.
When I notice more television and radio ads (and actual television shows) promoting gold, I suspect a top is forming. A rising promotional tide aimed at the retail buyer tells me we are approaching the saturation point, where there are few marginal buyers left to sustain the price trend. Once the last retail buyer is in, prices fall.
What are the Indicators Saying?
Real interest rates are rising. Nominal rates have spiked over the past two months and money supply growth has moderated (and will moderate further when the Fed starts to “taper” its purchases of mortgage-backed and U.S. Treasury securities.)
The yield curve is neutral, though it has widened in recent weeks. That said, the yield curve isn’t holding much sway and a widening curve hasn’t help support the gold price.
Credit spreads have tightened considerably in the past year, dropping to below 500 basis points from 800 basis points. A tightening credit spread is a sign of more risk acceptance, which tends to depress the gold price.
As for the retail buyer, I believe he’s nearly all in, which also doesn’t bode well for the gold price.
Conclusion
Not surprisingly, the immediate outlook doesn’t look good for gold. They’re saying gold is trending lower, and is likely to trend lower still.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://www.wyattresearch.com/article/what-these-4-important-indicators-say-about-gold/30036 (© 2013 Wyatt Investment Research & Business Financial Publishing LLC)
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