With recent sharp falls in the price volatility of a wide range of assets including gold and the markets’ apparent insensitivity to macroeconomic news, many gold investors have shifted focus to some of the more widely watched gold technical indicators to see if they provide insight into the future direction of the gold price. In this week’s short discussion piece we look at the Gold Forward Offered Rate (GOFO), the US inflation adjusted (real) interest rate and the Gold/S&P500 ratio.
- GOFO has turned positive again after spending much of April and May in negative territory.
GOFO (Gold Forward Offered Rate) is an actively traded rate in gold markets being the rate at which a participant can borrow gold in exchange for posting US dollar collateral. GOFO in essence reflects the total cost of carry of gold (technically it is the USD Funding Rate less the Gold Lease Rate) and given that it’s components are generally ‘non-negative’, it is uncommon for GOFO to turn negative. In a prior commentary we discussed a potential explanation for negative GOFO rates whereby there is a rise in demand for physical gold related to settling gold futures contracts and this is coupled with an environment where the supply of physical gold has dropped. When this imbalance has arisen in the past GOFO has occasionally become negative with an investor being able to earn carry to own gold and this has generally been supportive for the spot price of gold. After spending much of April and May in negative territory, GOFO has turned positive again indicating that spot gold prices are lower than the price of gold for future delivery. The absolute level of GOFO remains extremely low at 0.05% per annum but the switch in direction from negative to positive is perhaps indicative of the so-called ‘convenience yield’ for gold where investors have a preference for physical over future delivery, moving back towards a neutral level.Source: Bloomberg LP; Treesdale Partners calculations
- Very recent divergence between gold and the ten year US real yield.
Perhaps one of the strongest gold indicators to watch has been the US real interest rate (the US interest rate less inflation rate). The chart above shows the relationship between gold and the 10 year real interest rate over the last ten years. Note that the interest rate axis has been inverted to reflect that lower US real yields are generally associated with high gold prices. Over the last month there has been a discernible divergence between the gold price and the real interest rate (the chart below shows the divergence more clearly) with gold prices moving lower despite much lower real interest rates. For the relationship to move back into line either the real interest rate will need to rise (become more positive) or the gold price should stabilize and move higher. Should the recent drop in US real interest rates be sustained we would expect the price of gold to find support at current levels.
- The Gold price in USD as a ratio of S&P500 has fallen dramatically over the last two years.