These two charts show plenty upside for gold price

Time to pig out on gold

Gold jumped again on Friday building on a rally sparked by the US Federal Reserve decision to hold interest rates in the world’s largest economy near zero – levels  it’s been for the better part of a decade.

Gold for delivery in December – the most active futures contract on the Comex market in New York – jumped 2% or more than $20 an ounce for a day high of $1,141.70, a near three-week high.

The dovish statement from the US central bank mentioned subdued inflation in the US as data out on Wednesday showed CPI has in fact moved into deflationary territory. The Federal Open Market Committee also  expects inflation to reach its target rate of 2% only by 2018.

The Fed’s caution sent the dollar tumbling and bond yields falling. Gold and yields have a strong negative correlation. Rising real interest rates increases the opportunity costs of holding gold because the metal provides no yield and therefore the price should decline. Higher rates also boost the value of the dollar, which usually move in the opposite direction of the gold price.

Since the global financial crisis the relationship between interest rate expectations and the gold price has only become tighter with some analysts believing the metal can serve as an early warning system of both the direction and magnitude of the move in rates.

These two graphs from independent research house Capital Economics shows based on the correlation between gold and the dollar and gold and bond yields, the metal still has plenty of upside.

In fact given that the Fed adjusted downward its forecast for year-end 2016 interest rates to 1.375% from 1.625% in June, the gold price could go off these charts:

These two charts show plenty upside for gold

Source: Capital Economics

Image by Camil Tulcan

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