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Rising Real Interest Rates Could Drive Gold Prices Below $1,000 An Ounce - Analyst

are celebrating a positive firstquarter, one research firm has sent up a warning signal as it sees significantrisks to the downside because of rising real bond yields.

In a report Tuesday, New Zealand-based research firm TopdownCharts, said that the growing divergence between gold prices and rising realinterest rates is becoming “increasingly precipitous.”

Traditionally, higher real interest rates weigh on goldprices, increasing the precious metal’s opportunity costs as a non-yieldingasset.

But, Callum Thomas, head of research for Topdown Charts,noted in his analysis that since November, real interest rates have been movinghigher and so have gold prices. He added that the correlation breakdown can’tlast forever.

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” Thomas said in his report. Gram Chart Conversion , andthere is every possibility that the gap in the chart closes by real yieldsgoing back below zero. However, as thefed hikes interest rates and continues the transition from QE to QT, realyields are likely to remain elevated,” Thomas said in his report.

In the first three months of the year, gold prices rose 2%;

last traded at $1,335.7. At the same time, data fromthe U.S. Treasury show that real 10-year rates have risen 22%, from 68 basispoints to 84 basis points.

The analyst added that there is a risk that gold priceseventually fall to below $1,000 an ounce as the negative correlation withpositive bond yields and gold price reasserts itself.

Thomas said that gold has been able to fight rising yieldsbecause of its appeal as a safe-haven asset; however, he added that he doesn’texpect this trend to have a long-term impact.

“A big explanation as to why gold has diverged from realyields is hedging demand as investors worry about a potential bear market andheightened geopolitical risks. But evenif that is your thinking, the idea of opportunity cost is still relevant,” hesaid. “I would be cautious in treating gold as a hedge though, because when anasset class is facing significant headwinds like this, it may not end upbehaving in the way you expected.”

Not only does Thomas see gold as overvalued as a safe-havenmonetary metal, he also sees it overvalued as fundamental commodity.

Looking at gold’s technical picture, Thomas said that anyoneshorting gold at current levels should look at significant resistance at $1,375an ounce and $1,400 an ounce.

He added that his initial targets are the 2017 lows at $1,250an ounce and then the 2016 lows at $1,130 an ounce.

For silver, he said that he sees the market trading at fairvalue.

last traded at $16.385, down almost 4% sincethe start of the year.

The views expressed in this article are those of the author and may not reflect those of

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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