After Fed Chair has commented that rate hike might not be in the horizon, and we saw oil futures and the yield on the 10-year Treasury note were lower.
Gold prices rose. The U.S. dollar lost ground to the euro and yen, but gained versus the pound. Most major cryptocurrencies traded lower. But what I would like to discuss in this article is how bond yields and gold are related and how we can plan our investing and trading strategy around it.
Bond Yields and Gold Positive Relationship Not Confirmed?
If we were to take a look the relationship between Gold and the bond market, there is not really confirmation of a positive relationship.
The chart below presents the price of gold and the 10-year Treasuries (we took the yields and inverted them).
As one can see, the price of gold was rising in the 70s, despite the fact that bond prices were falling and rates were surging. Since the 1980s, there has been a long upward trend in bond prices, seemingly not related to changes in the gold market, as the shiny metal was in a bear market during the 1980s, the 1990s and in the last few years, and in a bull market during the 2000s.
Real Interest Rates Movement Matter For Gold
This is because what really matters for gold, are real interest rates, not nominal yields (high and accelerating inflation rates affect gold and bonds differently).
The chart below shows gold’s significant negative relationship with real interest rates (the 10-year inflation indexed Treasury rate is a proxy for U.S. long-term real interest rates).
Actually, the mirror reflection seen in the chart suggests that the real interest rates are one of the most important drivers of the gold prices.
Take Potential Opportunity In $SPDR Gold Shares(GLD)$
I would like to bring your attention to the ETF that we can take advantage now. We need to understand that the traditional argument is rising yields are bad for gold, usually investors believe that it is true.
But if we look at how there is a negative relationship between gold and interest rates. Investors normally have many choices to place their wealth in many ways. One of the quite popular choice is in currency like the US dollar, the euro or the yen. We are not going to discuss this here.
We will look at the second one which is in precious metals like gold and silver. We could see asian investors investing in Gold through holding the physical gold, but they are not getting any interest and it costs money for them to store the precious metal.
So another alternative of holding gold is in demat form like ETFs namely SPDR Gold Shares (GLD), and this etf have been gaining since the start of the year and the YTD return is 10.83%.
If we look at the technical analysis from demand and how the prices are moving. We could see that this might be a good time to buy as there is a small correction as shown by the declining triangle.
And we could be seeing demand (buying) coming from KDJ, and MACD should be trending upward as well. For the long term, as we navigate the rate decision, we should continue to see this trend, lower yield and gold should continue to perform.
Even though there is no rate hike, investors would still be looking for safe haven assets.
Summary
I personally would think that we should still invest in safe haven asset like precious metal (Gold), and GLD is one of the better ETF we can invest in. There is potential of upside as we navigate the volatile market condition.
We have seen market having small rally then suddenly change to downturn, would this continue? I believe it will for a while.
Appreciate if you could share your thoughts in the comment section whether you think GLD is a good investment to prepare us for the volatile market movement, this should help us to shoulder the risks of any events or economic data.
@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.
Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.
Comments
Great, Gold ETF
Gold?