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Forget About Yields, Gold In Direct Competition With Equities: Analyst

(Kitco News) - Although more than $10 trillion of global sovereign debt are providing negative yields, reducing gold’s opportunity costs, one analyst said this is less important than record high equity markets.

In an interview with Kitco News, Jeff Nichols, senior economic advisor at Rosland Capital and managing director at American Precious Metals Advisors, said that over-priced equity markets will be a bigger driver for gold prices than negative interest rates around the world. Jeffrey Nichols

Nichols said that funds that are still jumping into the bond market are doing so, not caring about negative interest rates, but are investing to capture price appreciation. A bond’s price is inverse to its yield, which means as bond yields go down, the price goes higher.

Nichols said that the large funds no longer care about long-term interest rates and are more focused on short-term performance.

“Funds are buying bonds for the same reasons they buy a specific stock. Right now, they care more about the capital gains. Most of them are not holding the bonds long enough to ‘clip their coupons,’” he said.

Instead, Nichols said that gold is currently in direct competition with equity markets, which have come off of its recent record highs and are due for a correction.

“As long as the stock market shows signs of vitality then gold prices will suffer,” he said. “Right now investors are thinking ‘why invest in gold when I can buy equities.’”

However, he added that he is expecting gold to begin the next phase of its bull market as equities correct from overvalued territory. He noted that major equity markets around the world are seeing new highs despite weaker earnings and growing expectations of slower global economic growth.

“The stock market is getting out of balance and that suggests we are in for a serious correction,” he said. “When the market does start to fall, gold will rally in a big way.”

Although equites are holding near last week’s record highs, gold has significantly outperformed stocks so far this year with gold futures up 24% since the start of the year. August Comex gold was last trading at $1,319.70 an ounce.

Equities suffered a major correction at the start of the year and as a result, the S&P 500 and the Dow Jones Industrial Average are both up only 6% on the year.

Although Nichols is bullish on gold, he didn’t provide any specific target; however, he said that he does expect the yellow metal to move above its 2011 peak of $1,924.

“The trigger could be a decline in equity prices on Wall Street and around the world, a decline that sends investors scurrying for protection, protection that only gold can provide,” he said.

By Neils Christensen of Kitco News; nchristensen@kitco.com

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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