| The bears are winning right now.
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| And I’m not talking just about gold, because the driving force behind the current downtrend in the yellow metal has been a major, world-wide sell-off in bonds.
I guess it’s somewhat comforting to blame a juggernaut like the global bond market for destroying my claim that gold had bottomed in early July, but it does nothing to alter the cold, hard fact that gold has tested the key $1,900 level...and failed the test.
As I noted the other day, as good as July was for gold, August has been precisely the opposite.
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| Gold began the New York trading session today with a nice, $10 gain, giving some hope that the price slide illustrated above was halting. But it didn’t take long for another bear attack to wipe out gold’s gains. As I write, it’s trading nearly unchanged.
Silver, on the other hand, has been showing an independent streak, with a young rebound apparently in progress.
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| That rally has continued today, with silver posting about a 1% gain even as gold has once again succumbed to a bout of selling.
The selling in gold coincided with a bounce in the Dollar Index this morning, along with a surge in the 10-year Treasury yield.
As you’re probably aware, I have the somewhat controversial view that the Dollar Index doesn’t drive gold, but rather both the dollar and gold are being strongly influenced by Treasury yields and, by extension, Fed policy (which is really the primary driver behind every asset market in today’s world).
Consider the following charts. In the first, I show gold plotted against the 10-year Treasury yield, with the rolling 20-day correlation below.
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| As you can see, the correlation between gold and the 10-year yield is strongly negative at -0.50. Interestingly, gold was rising in July even as yields were also gaining, because investors were beginning to price in the end of this rate-hike cycle. That’s why I called a bottom in gold and a new rally.
Unfortunately, the 10-year yield went into overdrive as the aforementioned global bond sell-off spread, and even gold has been unable to resist this headwind.
In contrast to gold, when we look at the Dollar Index plotted against the 10-year Treasury yield we see how strongly positive that correlation is:
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| At 0.94, you can’t effectively get much closer to a perfect, lock-step relationship between Treasury yields and the Dollar Index.
So it’s apparent to me that Fed policy, as manifested by the 10-year yield, is driving the bus. If the Dollar Index is having any influence on the gold price, it’s because the direction of yields is pushing the greenback first.
The key question now is what this means for gold going forward.
Sovereign bond yields are rising globally, thanks to the rate hike campaigns of central banks, led by the Fed. But yields at these levels are attracting big money eager to lock in these relatively rich, low-risk returns.
This demand, combined with the risk that soaring debt-service payments will destabilize national budgets, will soon send yields lower. At the moment, the odds of a Fed rate hike in September — a sure proposition a week or two ago — are now only 10%.
In short, I think gold has formed a double bottom, and is back on track to end its summer slowdown on time.
If you haven’t guessed by now, I’m encouraged by silver’s behavior in the short term, and remain very bullish on the metals sector over the longer term.
Look at it this way: While we have no idea where the gold price will be tomorrow or next week, we can be very confident that it’s going to be significantly higher this fall...and will challenge the record high by early next year.
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| So if I’m bullish on the sector, I’m bullish on junior miners at the current bombed-out levels.
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| To get my current recommendations in the mining sector, including two exciting new picks that seem poised to take off, I urge you to subscribe to Gold Newsletter now.
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| Brien Lundin
Publisher, Gold Newsletter
CEO, the New Orleans Investment Conference
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