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Gold: Alas, It Isn't A Bottom Yet

Oleh Kombaiev profile picture
Oleh Kombaiev


  • Inflation and interest rates determine the price of gold.
  • Both of these factors are now negative for the gold market.
  • Despite the recent fall in the price of gold, the potential for further decline still remains.

Investment Thesis

The analysis of the fundamental dependence of gold price on real interest rate allows drawing a conclusion that the negative market trend persists.

The dynamics of the real interest rate has been, and remains, a key factor shaping the long-term trend of gold price.

Gold vs Real rates

To be precise, judging by the value of the rolling correlation over the last 90 days, a 70% change in the price of gold was due to the change in the U.S. real interest rates. I will assume that this dependence will persist in the near future.

Gold vs Real Rate

In other words, the formula is simple: the higher is the yield of the U.S. bonds and the lower is the inflation, the cheaper is gold, and vice a versa. Ironically, both of these factors are now playing against gold.

The U.S. macro statistics published in the last week cannot be defined as "positive". In May, personal consumer income rose by 0.4% YOY (higher than the expected + 0.3% YOY) continuing the positive trend of the previous two months.

United States Personal Income

But it was not a stimulus for growth in consumer spending. In May, this indicator rose by only 0,1% YOY as compared to 0,4% YOY in April.

United States Personal Spending

This is explained by the fact that the income is growing not due to the increased wages, but due to the additional sources of revenue, for example, rents. Generally, this kind of income goes into saving, rather than consumption. As a result, in May, the U.S. inflation was falling for the fourth consecutive month, despite the fact that the economy is close to full employment.

United States Inflation Rate

On the other hand, over the past five trading sessions, the UST-10 yield increased by 21 bp, however, the investors still do not expect the U.S. interested rate to be increased more than once before the end of the year (probability - 50.6%). In my

This article was written by

Oleh Kombaiev profile picture
Individual investor, data and financial analyst. I am interested in investment decisions based on objective methods of modeling and statistical analysis. Besides, I pay much attention to the psychological aspects of decision making.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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