Should gold price be $100 higher right now? MKS PAMP Group weighs in
(Kitco News) Shouldn't gold be at least $100 higher from the current levels in light of such low U.S. yields? MKS PAMP Group explains.
Instead of seeing a rally amid this risk-off tone, gold is struggling to hold the $1,800 an ounce level. At the time of writing, August Comex futures were trading at $1,797, down 0.16% on the day.
"With the risk-off tone permeating the markets again (as the Chinese regulatory overhaul spooks investors & triggers a selloff across global equities*), U.S. yields are under pressure, once again," said MKS PAMP GROUP head of metals strategy Nicky Shiels. "10yr yields are being pressured to 1.22%, EM/FX is being hit, the VIX is creeping up on 20, and U.S. TIPs hit another all-time high."
Yet, in light of all these factors, gold's rally is nowhere to be seen. "It's just another frustrating instance for many gold bulls why prices are consistently lagging U.S. (real or nominal) yields," she wrote in a report.
Based on Shiels' analysis, gold should be around the $1,900 an ounce level. "Given current yields today, the regression model implied gold price is $1,885, or $1,940, depending on your choice of real yields; ultimately, gold should be over $100 higher (using weighted average)," she said. "No wonder there're many questions around why the price isn't responding higher."
Shiels provided three reasons as to why gold is not reacting to lower yields. The first is the U.S. dollar, which is still strong enough to weigh on gold, with markets projecting more greenback strength once the Federal Reserve begins to taper.
Second is the risk of a hawkish Fed. "A low-probably (but high-impact) repeat of 2013 tantrum. While that was worth -$300 in gold prices and unlikely to repeat, as with US$, the path of least resistance is higher, not lower. That has kept core fast money investors anxious, sidelined, and wary of any taper headline risk," Shiels said.
And third is the short-term technical outlook, which is keeping investors on the sidelines.
The precious metal needs a new driver to move towards the $1,900 level, or otherwise, it might be at risk of another selloff, she added.
"A new bullish catalyst is required, and shortly, once the current event-risk is over, for prices to revisit newer territory ~$1900; because the market has increasingly respected the adage that what can't go up, must come down," Shiels explained. "Ultimately any additional macro equity volatility, a change of the complacent regime we've been in, will be bullish precious, in time."