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Secondary Drivers of Gold Price (Lesson 1, Video 2/3)
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Secondary Drivers of Gold Price (Lesson 1, Video 2/3)

Secondary Drivers of the Gold Price

In this video, the speaker discusses secondary drivers of the gold price, focusing on the yield curve and the U.S. dollar.

The Yield Curve

  • The yield curve refers to the difference between short-term yields and long-term yields.
  • A flattening yield curve, where there is a decreasing difference between short-term and long-term yields, usually occurs during an economic expansion and stock market boom.
  • This happens when the Federal Reserve raises short-term rates faster than long-term yields, resulting in disinflation and a decrease in the inflation rate, which is bearish for gold.
  • On the other hand, a steepening yield curve, where there is a widening difference between short-term and long-term yields, is bullish for gold.
  • This can happen when long-term bond yields rise faster than short-term rates or when short-term rates decrease faster than long-term yields due to risk aversion and loss of confidence in the economy.

Gold and the Yield Curve

  • Historical analysis shows that periods of gold performing well often coincide with a steepening yield curve.
  • Conversely, periods of a flattening or inverted yield curve tend to be associated with a decline or lack of performance in gold.
  • The current flattening curve since early 2021 has coincided with a stagnant gold market.

The U.S. Dollar

  • The trend of the U.S. dollar is an important factor in determining the trend of the gold price.
  • Gold is priced in U.S. dollars and serves as an alternative to it as it is considered the global reserve currency.
  • While gold is negatively correlated with real interest rates, there tends to be a positive correlation between the U.S. dollar and real interest rates.
  • However, this negative correlation between gold and the U.S. dollar is not perfect, and there are instances where their correlation has lessened.
  • Historical analysis shows that gold can perform well even if the U.S. dollar is relatively stable and not plunging.
  • A sustained secular bull market in gold requires a relatively weak U.S. dollar over a long period.

Gold and the U.S. Dollar

  • The correlation between gold and the U.S. dollar has varied throughout history.
  • There have been periods when they trend together, such as from 2016 to 2020, but ultimately, a secular bull market in gold requires a weak dollar.
  • The negative correlation between gold and the U.S. dollar on a longer-term basis is less than normal.
  • Gold has performed better during the current long-term uptrend in the dollar compared to previous uptrends.
  • Gold has shown tendencies to lead the U.S. dollar at key turning points, indicating that it can bottom or peak before the currency.

Conclusion

In this video, we explored secondary drivers of the gold price, including the yield curve and the U.S. dollar's trend. Understanding these factors can provide insights into how they influence gold's performance.

This summary provides an overview of the main points discussed in the video regarding secondary drivers of the gold price. For more detailed information and analysis, it is recommended to watch the full video.

Gold Performance and US Dollar Strength

This section discusses the relationship between the performance of gold and the strength of the US dollar.

Gold and US Dollar Performance

  • The US dollar declined below its 2016 low in 2017, while gold could not surpass its 2016 high.
  • Gold peaked in August 2020, but the US dollar did not bottom until January 2021.
  • Currently, gold is being affected by the strength of the US dollar, which has caused a drop in its price to below $2,000 an ounce.

Relationship Between Gold and Dollar Peaks

  • Historically, when analyzing gold's performance, it is important to look for a bottom in the gold price before the dollar peaks.
  • The significance of the upcoming dollar peak will determine if gold can rise for only a few years or if it can begin a new secular bull market.

Analyzing Gold's Performance Against Foreign Currencies

This section explores how analyzing gold's performance against foreign currencies can provide insights into its overall performance.

Charting Gold Against Foreign Currencies

  • One way to analyze gold's performance in real terms is by charting it against foreign currencies or using the inverse of the US dollar index.
  • By multiplying gold by the US dollar index, we can plot both gold and gold against foreign currencies on a chart.

Examples of Divergence

  • There are several examples over the past few decades where gold against foreign currencies led to key turning points in the gold price.
  • In some instances, such as during the early 2000s and financial crisis periods, gold against foreign currencies made significant breakouts or bottoms before corresponding movements in the gold price.
  • However, there are also examples where non-confirmations from gold against foreign currencies led to declines in the gold price.

Significance of Gold Against Foreign Currencies

  • Gold against foreign currencies reflects how gold is performing without the influence of the US dollar.
  • If gold is rising but gold against foreign currencies is weak, it indicates a weak US dollar rather than strength in gold.
  • Conversely, if the US dollar is climbing but gold against foreign currencies shows strength, it signals the strength of the dollar rather than weakness in gold.

Gold's Performance During Dollar Appreciation Periods

This section discusses how gold has performed during periods of US dollar appreciation and highlights its ongoing strength against foreign currencies.

Gold's Resilience During Dollar Appreciation

  • Over the last 11 years, as the US dollar has risen gradually, gold has held up better compared to previous periods of dollar appreciation (1979-1985 and 1995-2001).
  • The reason for this resilience is that gold against foreign currencies has consistently been stronger than in previous decades.

Potential for Gold to Skyrocket

  • From August 15, 2018, to August 6, 2020, while the US dollar declined by only four percent, gold gained 75 percent.
  • If and when the US dollar experiences a significant decline over an 18 to 24 month period, given its ongoing strength against foreign currencies, there is potential for gold to skyrocket during that period.
Video description

Yield Curve The yield curve or yield spread is the difference between short-term yields and long-term yields and is also a driver of the price of Gold. The most common spread is the difference between the 2-year yield (a proxy for the Fed Funds Rate) and the 10-year yield. A flattening curve (which entails a shrinking or decreasing difference between the two yields) usually accompanies the middle part of an economic expansion and stock market boom. The yield curve flattens because The Federal Reserve is raising short-term rates, and they are rising faster than long-term yields. The result is disinflation (a decrease in the inflation rate), which is bearish for Gold. On the other hand, a steepening curve (or widening of the yield spread) is bullish for Gold. This can happen in one of two ways. Long-term bond yields rise faster than short-term rates (implying an increase in inflation expectations), or short-term rates decrease faster than long-term yields. That implies risk aversion and a loss of confidence in the economy and capital markets. The yield curve will move from flattening or inversion (short-term rates are higher than long-term rates) to steepening when the Federal Reserve starts cutting interest rates. US Dollar The US dollar trend is an important factor in determining the trend of the Gold price because Gold is priced in US Dollars. More importantly, Gold is essentially an alternative to the US dollar because it is the global reserve currency. While Gold is negatively correlated with real interest rates, the US dollar tends to be positively correlated with real interest rates. However, it is important to note that the negative correlation between the two is not perfect, and there is some evidence that the correlation has lessened recently. Previous Video: (Lesson 1, Video 1) https://youtu.be/3OfcFD1LFGI RESOURCES FOR YOU...... ------------------------------------------------------------------------ ★Download My Book★ ↪https://thedailygold.com/book ★ Learn about my premium service ★ ↪https://thedailygold.com/premium Follow Me on Twitter: ↪https://twitter.com/TheDailyGold #Gold #Silver #Inflation