Gold poised for upside breakout

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The post below is a guest contribution bt Simon White, head of risk management, at Hinde Capital.

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.

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.

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.

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.

Source: Simon White, HindeCapital, August 7, 2012.

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3 comments to Gold poised for upside breakout

  • […] post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail. Gold poised for upside breakout was first posted on August 10, 2012 at 8:20 am.©2011 “Investment Postcards from Cape […]

  • Jon A. Peterson

    Knowing you are a long-time observer of gold, I value your opinion. But the first two graphs you display in support of your viewpoint, while no doubt clear to you, are incomprehensible to me. If you want to effectively to your readers, you need to be a better educator (in this case, explain the graphs better). Your text, as distinct from the graphs, is much better. Jon A. Peterson

  • Lawrence Impey

    Hopefully I can explain the first graph: Annual gold price versus real interest rate shows the price of gold relative to how much interest you would get if you put it in a bank (in real terms). So, if you are getting 3% interest but inflation is at 4% you are losing 1% a year i.e. real interest rate is -1%. So look to the left of the vertical bar (y-axis) you can read off the expected rise in the gold price (15%). The reason is that in this situation investing in gold doesn’t cost you much compared to leaving your money in the bank i.e. you are not foregoing much in interest payments from the bank if you buy gold instead.
    Hope this helps!

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