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What Is the Gold Price Rally Telling Macro Investors?

What Is the Gold Price Rally Telling Macro Investors?

Nancy Pakbaz, CFA, Markets Writer

Key Talking Points from the Podcast:

  • Gold continues to gain despite lagging inflation concerns and a strong USD
  • Emerging Markets and Commodities have started 2019 on a hot streak
  • Inflation concerns are not keeping investors up at night according to a specific model
  • Catch all episodes of the DailyFX Podcast, Trading Global Markets decoded here
XAU/EUR,EUR/XAU, gold against euro

Data source: Bloomberg

What’s Going On?

The price of gold has been rallying up due to the concern about Venezuela’s political situation and the European slowdown.

What Does This Mean?

Since the price of gold is tied to the USD, the performance of the dollar influences the direction of the price of gold. However, the USD is a small factor influencing the current gold uptrend. The main factors influencing gold is the fear found amongst investors.

The European slowdown has caused investors to be worried as to where the Euro will stand. With German business confidence decreasing and the Fed meeting approaching, investors may be coping with nerves by purchasing gold.

Why Is This Important?

The current uncertainty in the economic landscape may further increase the price of gold since investors tend to lean towards gold when markets are unsure and worrisome.

MSCI and Commodities

Data source: Bloomberg

What’s Going On?

When looking at the graph above, we see that the MSCI and the commodities index have been moving in the same direction.

What Does This Mean?

It appears that the commodity index is rising due to potential positive relations between the U.S and China. President Trump and President Xi Jinping seem to be getting close to an agreement, which reduces market uncertainty and could further help emerging markets and commodities.

What’s Going On?

10-year US bond yields have remained low and with the Fed’s dovish stance, it may continue this way.

What Does This Mean?

According to the Adrian Crump Term Premium Model, it is assumed that inflation and fear from investors are positively correlated. Therefore, this would indicate that the yields will continue to remain low since there is currently no fear of inflation per the model. If this is the case, based on the Adrian & Crump model, there would be little reason to use gold to hedge inflation.

What’s Going On?

The equity markets have continued to push up without the support of fundamentals. This is partly due to the liquidity injected into the market, which artificially pushed the market to a higher level.

What Does This Mean?

Recently, senior analyst Tyler Yell interviewed former Federal Reserve advisor, Danielle DiMartino Booth, who made a great statement regarding the severity of the current market situation. She states that, “we are sitting at a negative $20 billion per month of central bank liquidity vs. a prior $100 billion per month aggregate flood. This is a huge swing of the liquidity pendulum and I have no idea what the repercussions will be going forward as an experiment of this magnitude has never been implemented and subsequently unwound.”The interview can be found here.

--- Written by Nancy Pakbaz, CFA

Follow Nancy on Twitter @NancyPakbazFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.