Why you need to own this asset
Over the past couple of weeks, the Trading Floor has secured a number of wins in the metals market and I am going to explain why we are bullish on the metal and why you need to do something about it!
Real Rates V Nominal Interest Rates
A nominal interest rate is a rate you will receive from the bank, at the moment, the US has a nominal rate of 0.25%. Meaning if you leave $10,000 USD in the bank you will receive a measly $25 USD return. This does not take inflation into account.
It gets worse…
Real rates are an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. For example, if the current interest rate is 0.25% and inflation is at +5% the real interest rate would be -4.75% (0.25 – 5 = -4.75). This is something the Central Bank does not report, but this is the KEY driver of gold prices. The further real rates move into the negative the higher gold prices will rise.
The real rate gives a more accurate measure of yield when factoring in the cost of inflation. Currently, the real rate in the US is -5.3%, not 0.25% which is what the FED wants you to believe.
US Real Interest Rates
The blue line in the chart above is REAL rates, the red line is inflation and the black line is nominal rates.
As you all know, inflation is currently running hot across the financial markets due to supply chain issues and the impacts of the covid-19 pandemic, currently sitting at a 14 year high at 5.4%, whilst the nominal interest rate is at record lows at 0.25%.
This is expected to get worse leading into a busy Christmas period as the demand for retail, travel, technology and energy is forecast to rise. Europe the UK and China are already facing energy supply issues.
To put it simply, changes in real interest rates are crucial to understanding movements in the price of gold. The inverse relationship between real interest rates and the gold price is quite well-established in research. The biggest booms in the gold market occurred in negative real rates environments, first during the 1970s, when both nominal interest rates and inflation rates were high, and later in the 2000s, when both nominal interest rates and inflation rates were low.
This week, FED Governor Christopher Waller jawboned the possibility of interest rates rising next year in the US. He stated the FED should begin tapering bonds next month, though interest rate hikes are probably some way off. The FED’s most recent dot plot showed half of the policymakers see rates rising by the end of 2022 and the other half expecting a rise by the end of 2023. If the FED delays raising interest rates the USD could see a decline across the board which plays into a long bias across metals.
Real rates are negative and based on the current market climate and what is yet to come, they could fall further which supports higher gold prices.
GOLD Technical Analysis
Gold has faced a year of consolidation whilst other assets have taken off to the upside including the crypto market. However, gold is now facing a potential breakout from the pennant formation over the coming weeks which has the Trading Floor team very excited!
We can also see a possible inverted head and shoulders structure in play which indicates a bullish change in trend. An inverted head and shoulders structure is generally found at the bottom of a trend and we have used this technical setup on multiple occasions. The 1840 resistance is a KEY level that needs to be taken out as it is the neckline of the inverted head and shoulders and also the negative trend line resistance. Once this level is taken out we can confirm the bulls are back and can expect a rapid move to the upside!
If you are looking to take advantage of this opportunity in the metals market but are not sure where to start, book a call to speak with one of our experts!