Gold: It’s All About Real Rates, Not The Dollar
The comments below are an edited and abridged synopsis of an article by Michael Pento
Those who believed the US dollar would increase its buying power against gold have been dead wrong. This is because the primary driver behind the dollar price of gold is the direction of real interest rates.
Therefore, it is imperative not to measure the dollar’s real strength by measuring it against other flawed fiat currencies that are backed by even more reckless central banks. Instead, the genuine value of the dollar should be weighed against real money…gold.
Conventional wisdom tells us that the dollar and gold have a reciprocal relationship. When the dollar decreases in value, gold increases, and vice versa. However, recently the dollar and gold have both been strengthening in tandem.
Again, the primary driver of gold isn’t the direction of the dollar but the direction of real interest rates. So if US growth is accelerating in a non-inflationary environment, gold should suffer regardless of the direction of the dollar. Conversely, the dollar can be in a bull market against a basket of fiat currencies—as it has been for the past year—and yet can still lose ground against gold as long as nominal interest rates are falling in an environment of rising inflation.
The year-over-year change in core CPI increased 2.4% in August, which was the highest level in a year. Meanwhile the US 10-year note yield was crashing from nearly 3% to 1.6% over the past 12 months. Therefore, real yields have been crashing as gold has been rising.
These falling real yields were rocket fuel for gold, despite the dollar’s bull market against the euro and yen. Gold increased by double digits, even though the Dollar Index has also increased by nearly 5% in the last 12 months. But it can be a love/hate relationship; it is still down 20% from the highs of 2011, and the mining shares have crashed by 60%, underscoring the need to know how to trade the cycles of this sector.
So: Have nominal yields stopped dropping, and where is inflation going? In the short run, the answer can be found in the recent trade talks. It is time to reach an agreement with China, as Wall Street and international corporations cannot do business under this cloud of uncertainty.