Gold Poised for Upside Breakout of Current Range

Gold has been caught in a very tight range since the 16% rally at the start of the year and the subsequent sharp sell off in late February and March.  Often when prices in any asset become compressed, they invariably break out of the range emphatically.  With gold, the fundamentals remain supportive which suggests that gold should break out from its range to the upside.

 

Specifically, global liquidity conditions are very accommodative and global interest rates are being lowered ubiquitously.

 

Source: Variant Perception

 

Currently, the VP Expected Real Interest Rate is -2.75% which implies a subsequent year-on-year return for gold of over 20%.

 

Furthermore, gold is strongly underperforming relative to the rule of thumb provided by Gibson’s Paradox.

Source: Variant Perception

 

The rule states that for every percentage point the real interest is below 2%, gold returns 8% year-on-year times that multiple.  Real rates are currently -1.45%, which implies a 28% performance for gold over the next year.

 

Finally, China has sharply ratcheted up its imports of gold.  In Q2 this year, China imported 248 tonnes of gold, an increase from 43 tonnes in the same period last year.  248 tonnes is equivalent to the entire annual gold output of Australia.  To May this year, China has imported more gold than the entire official gold holdings of the UK.

 

Source: Standard Chartered

 

With supply being swallowed up by the official sector, mainly in Asia, and central banks moving to the next chapter in the search for effective monetary policy in the from of negative nominal interest rates (see previous post on this), gold will soon be on the rise once more.

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