In "Charts to Ponder," I began to premium subscribers receive a chart with gold and its pricing proxy:

Gold began its near-term inflection as financial conditions began tightening in mid-September. As mentioned in "The Powell Pause Put," the volume during the ramp is not confirming bullish sentiment; and prices are stagnating under $1,300.

The pricing proxy is also stagnating even as the dollar mulls around 95.40. The link between gold and the 5-year inflation breakeven remains tight, and there is data to support that lower inflation expectations will hinder gold's progress.

Since then, there has been an important observation: since the announcement of the dual triple R cut (to be implemented on Jan. 15 & 25) out of China, combined with the injection 1 trillion yuan to bolster liquidity, gold began stagnating.

The stagnation had developed a $20-or-so range within a symmetrical triangle which has since broken to the downside. There is a few reasons for this:

  • 5-year real yields are up from 86 to 95 bps, dollar has regained 96.
  • TIPS continue to grind lower.
  • U.S. 10s/2s curve remains comprised.
  • Market based pricing proxy is down 1.28 percent v gold's .91 percent decline from triangle.
  • Asian exporters sending out disinflationary wave; AE7 FX Index & gold pricing proxy correlation .6.

Gold (orange); Gold Pricing Proxy (red)

Gold's decline is small, so far, but the factors influencing price are dynamic and require monitoring. Real yields rising are important due to the historical negative correlation with gold.

In early 2019, gold and real yields were oddly positively correlated. This occured in early 2018, too. What this suggests is gold is being tapped for liquidity purposes, particularly in China. The positive correlation broke as China injected massive liquidity into their troubled system.

If China does not remove these liquidity measures following the Lunar New Year, gold could see a rapid decline unless the Fed comes to their rescue.

Intermediate TACVOL range for gold is 1306.81/1165.88.

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