Email of the day on when gold does best:
Comment of the Day

August 26 2022

Commentary by Eoin Treacy

Email of the day on when gold does best:

Your stated position on Gold, is that it did well in a low interest rate environment but is struggling now in the face of rising interest rates and strong US Dollar.

But surely with inflation hard wired into system, we are still in a relatively low interest rate environment, as interest rates should be around about 11% to effectively reduce inflation.

I have bought more gold today, regardless of outcome of the FED meeting today.

Eoin Treacy's view

Thank you for this email which may be of interest to the Collective. My stated position is gold does well in a negative real interest rate environment and when the Dollar is trending lower. Incidentally, that is also when the emerging markets also tend to do best.

At present we have negative real rates but they are growing less negative as nominal interest rates rise. Since markets are discounting mechanisms, that is being priced into gold and other assets.

The Federal Reserve is raising rates faster than other developed markets and the USA is energy independent and selling large quantities of LNG to Europe in dollars. That is supporting the Dollar at the expense of major energy importers like the EU, Japan and UK.

Gold is holding up well against weak currencies like the Euro and Pound but is susceptible to additional selling pressure when priced in Dollars.
High energy prices are a bigger issue for miners than volatility in the metal price. The VanEck Gold Miners ETF continues to trend lower primarily in response to energy costs hitting profitability.

In normal circumstances, negative real interest rates beget a weak Dollar. That’s not working today because the rest of the world is in worse condition than the USA and it is not an energy exporter. That’s the clearest rationale I can muster to explain why gold has failed to perform despite high inflation.
The Dollar will not be strong indefinitely. However, until it turns around, the gold is going to experience a significant headwind.

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