Let’s focus in on negative interest rates and the potential for gold to increase in value.
As the Fed met in Jackson Hole over the weekend, Gold was trying to hold on at the $1,300 level. Using a negative real interest rate model, gold should be around $1,400. Why? There is lots of concern about global GDP growth maintaining itself.
Let’s take a look at the overall metals landscape. Some precious metals appear to be doing well. Palladium is at a 13-year high and rhodium is up 45% from the start of year. However, it is important to understand that rhodium has much greater volatility than gold or Silver, although it is important in industrial growth. If the global economy remains “strong,” then rhodium will run even further. Platinum is “more emotional” than gold, but if there’s a big spike in gold, there will be a similar spike in platinum.
Gold Stocks
Turning to gold mining stocks, they are beaten up. In 2007, gold mining stocks peaked at almost 25 times cash flow. In 2013, they fell to four times cash flow, and now are up to 5.5 or 6 times cash flow. Twelve times cash flow is the all-time average, so, they have more upside than downside potential.
China experienced a 51% decline in gold imports in the second quarter year over year. This was in part due to the fact that the ability to track gold moving from Switzerland to China has become more difficult. The same is true for India. The ability to track how gold gets into India is far more challenging so the figures are falling. Furthermore, for China, last year most of the gold being dumped from ETFs went to China, so China’s spectacular growth last year makes it difficult to maintain growth this year.
I do not see Europe’s trade surplus in June as a threat to gold. What’s really important is negative real interest rates? The German 2-year bonds went negative and US 10-year bonds fell, which is good for gold.
Bottom line? The real concern is that Yellen is going to pull away the punch bowl from the party and interest rates are going to spike. I’m of the thesis that it can’t spike very far given various regulations and rules. Governments are going to have to maintain real negative interest rates and that is positive for gold.
For the coming days, if the CPI is positive or flat at 2%, with the 10-year government bond falling, then I think gold pops on that because of interest rates. I’m also watching for the China CPI, a key to commodity usage, including precious metals.
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