The price of gold has recently risen sharply – above all due to the expectation that the Fed (but also other central banks such as the ECB) will lower interest rates or even start quantitative easing (bond purchases) again due to the weak economic situation. This would virtually eliminate the disadvantage that gold has due to a lack of interest rates, especially if there are already negative deposit rates in many currency areas or even long-term government bonds have a negative yield.
Lars Erichsen shows in this video (see below, in german) that the price of gold reacts mainly to real interest rates (i.e. the lending rate minus inflation). In his view, gold will reach new all-time highs – but in the short term, given the current euphoria over the rise in the gold price, there are risks for a larger setback. This could be a less dovishe attitude on the part of the Fed, as the markets (including the gold market) have priced in between three and four rate cuts in the next 12 months. For an interest rate cut of 0.5%, the Fed Fund Futures are currently pricing in a probability of over 28% – even though even the dovish FOMC member James Bullard recently ruled out such a move!
Interesting is also the ratio between the leading index S&P 500 and gold, more precisely between the relevant ETF called “SPY” on the world’s leading index, the S&P 500, and gold or the relevant ETF on the gold price, the “GDL”. This could indicate the end of the upswing cycle, as Michael Krieger writes:
„Personally, I think the cycle’s over and we’ve entered a new era of increased chaos within the economy and, more specifically, the global financial system — and the SPY/GLD ratio is flashing this warning signal.“
This statement should be understood in the medium to long term. In the short term, as Lars Erichsen shows in the following video, a fall of the gold price below the 1380 dollar mark (and thus back below the previous breakout zone) at the end of the week would be a very negative sign:
Gold price: short-term risk of setback
The last two long wicks are conspicuous, then a “hanging man”- candle. It is also noticeable that the rise in gold and the Dow Jones took place at the beginning of June:
But back to gold and its short-term prospects: Especially astonishing is this video, in which Erichsen, as always, clearly argues this time that he is really short..: