A report by the “alchemist” recently caught our eye as the publication by The LBMA portrayed an interesting take on whether the gold price has already adjusted to FED compression. This they suggest would make it unlikely to see a repeat of the price plummet of 2013.
As you know 2013 saw the gold price nose-dive as momentous outflows parted from ETF’s, whilst traders prepared for the reigning back of the fed stimulus scheme which is likely to come to an end shortly.
The Alchemist studied in detail gold’s correlation with the 10 year TIPs yield (US Treasury Protected Inflation Security). Then throughout a series of charts with different variables of the gold price were plotted against TIPs of which the outcome is particularly significant.
The charts appear to show that gold has already discounted what the fed is likely to do later today.
What does this mean for the gold price?
Historically a rise in real interest rates is not supportive towards the gold price. However the thought-provoking point is the price of gold fell by 29% in 2013 at the same time US real interest rates only rose for a brief time. Therefore one could assume the price of gold has already factored in what the fed is likely to do going back to the price drop in 2013.
Obviously there were other factors which contributed to the price drop of 2013 such as an optimistic view of the Eurozone and a surge in equities but does this mean gold has now factored this into its price of what the fed is likely to do?
Of course no one knows with a particular amount of certainty how the gold market will react to the enviable hike in short term interests rates but we are sometime off that day as the fed most likely won’t raise interest rates until a degree of inflationary pressure is felt, and as always this does not factor in any unexpected geo political game changers which could be thrown into the mix.