There is a school of thought that considers the latest rally in gold as the start of a new bull market in gold. We were not convinced while gold rallied, and we are not convinced as it now falls back. Before bulls ‘buy-the-dip’ they should consider what is happening in the four correlated markets.
Interest Rates and the Dollar
Gold correlates negatively with the dollar and with Treasury rates. Since the start of the year, both rates and the dollar have had a steady downward trajectory that seems to have come to an end. The Fed is not backing away from another rate hike before the end of the year, and the balance sheet reduction that will start next month is a form of tightening that should put upward pressure on bond rates. The bias for rates is up which will put downward pressure on gold.
USD/JPY FOREX Pair
The USD/JPY pair has a strong negative correlation with gold. The USD/JPY has moved up past the 38% Fibonacci retrace line which puts 114 in play, and further pressure on gold.
Although the gold bulls are convinced that the inflation numbers are fake, we have to go with the inflation proxy that best correlates with gold; Treasury Inflation-Protected securities etf (TIP). As the chart below demonstrates, TIP correlates positively with gold and although it has been elevated for some time, over the last two weeks the inflation expectation has fallen along with the price of gold.
In conclusion, we suggest that dip buyers hold off until we see what rates, the dollar, the USD/JPY, and inflation do. Since the bias in rates is up, it will likely be quite some time before it is safe to go back in the water.
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