For gold investors, paying attention to the movement of natural interest rates is a must, according to Marcus Garvey, commodities strategist at ICBC Standard Bank. Right now, a notable oversight by the capital markets could be a lack of pricing in natural interest rates, which doesn’t bode well for gold investors.
“In simple terms, r* is the short-term real interest rate when an economy is at full strength, with stable inflation,” said Garvey. “What stands out from a market perspective is that no real expectation for a higher r* is currently priced and that it would be a significantly bearish development for gold prices. Of course, r* may fail to recover and there are many other drivers of the gold price but, for long-term gold investors, developments in the long-run equilibrium U.S. interest rate need to be given considerable care and attention.”
Amid a backdrop of a GDP that increased by 4.2% in the last quarter and an extended bull run in the stock market, more rate hikes in the federal funds rate by the end of 2018 is a strong bet. Of course, that’s the news that gold investors may not want to hear, but for bearish gold traders, it’s music to their ears.
“The potential for an increase in r* to justify higher real rates is the one case which seems unambiguously bearish for gold. In this case, higher real rates would be justified by a higher trend growth rate and, therefore, a still positive backdrop for most risk assets,” said Garvey.
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