Are gold prices really bottoming? That all depends on the indicator

By: Donald_W_Dony

Holding gold has largely been about a hedge for inflation, weak US dollar or a store of safety during times of trouble. At present, it is the inflationary pressures that is the main driving force for the yellow metal.

Inflationary pressures are building around the world as the global economy tries to reopen. Consumer prices are sharply rising with the US Inflation rate posting a three-decade high of 6.2% in October and Germany hitting 4.5%, the highest level since 1993.

But, as these fears of rising inflation have dulled the risk appetite and boosted demand for the safe-haven metal for many investors, the advancing dollar is pulling at the heels of the gold market and limiting its upside (Chart 1).

The greenback has formed a base back in the first half of 2021 and recently broken out of that base. Now trending higher, models point to $0.96 as the next target.

Another factor that can take some of the bullishness out of gold market are the yields in the US bond market. The 10-year T-bonds yields have a close opposite correlation to the yellow metal since 2019. Since mid-2020, the trend for these mid-term yields has been up. There has been some stalling at the 1.66% to 1.74% range and that pause appears to have aided gold prices short-term.

The last indicator (Chart 2) shows that gold prices are more aliened to US Consumer Inflation Expectations than to the US Inflation Rate itself. But since 2021, there has been a slight separation growing, suggesting that consumer inflation expectations may have gotten ahead of gold prices.

Bottom line: At present, gold prices appear to be winning the battle against the rising US dollar and advancing US 10-year T-bond yields. We suspect that these last two elements will eventually limit the upside strength in gold.

Models point to $1875 as a peak for gold.

Also, I will be offering a FREE educational presentation on December 1 between 2:10 pm and 2:40 pm. The presentation is titled "Simple Method to Outperform the Index".

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2020 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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