I’m convinced most people fail to buy and sell gold intelligently. I say that because most people are unclear on what influences the gold price. Today, the haze will be cleared. Below are the four most important indicators every gold investor must know. If you understand and correctly interpret these four indicators, I guarantee you’ll make more intelligent buy/sell decisions. More importantly, you’ll make more profitable ones as well.
1. Interest Rates
The price of gold moves inversely with interest rates. Interest rates rise, the gold price falls … and vice versa.
But let me clarify: the gold price moves inversely with real interest rates, which is the nominal interest rate (the quoted rate) less the expected inflation rate.
For example, if someone pays you 3% on a 10-year bond, that’s the nominal rate. To get the real rate, subtract the expected inflation rate, which IS NOT the consumer price index most people use. The inflation rate is the expected growth rate of the money supply.
So if we expect the money supply – currency, coin, checking accounts and small and large savings accounts – to grow 2%, we know the real interest rate is 1% (3% minus 2%).
Remember, don’t focus on the nominal rate, as it will lead you astray. Focus on the real interest rate.
2. The Yield Curve
The difference between long-term and short-term interest rates will also indicate where gold is heading.
A rising yield curve is generally bullish for gold, and a flattening (or inverted) yield curve is generally bearish.
A rising trend in long-term interest rates relative to short-term interest rates indicates either falling market liquidity (associated with increasing risk aversion and a flight to safety) or rising inflation expectations, both of which are bullish for gold.
On the other hand, an inverted yield curve – short-term rates higher than long-term rates – is bearish. Investors expect the Federal Reserve will loosen monetary policy, making riskier investments like stocks more appealing.
3. Credit Spreads
Credit spreads – the difference between interest rates on high-quality and low-quality debt securities – might be the most potent of the four indicators.
The gold price tends to do relatively well when credit spreads are widening and relatively poorly when credit spreads are contracting.
When the spread between a U.S. Treasury bond and junk bonds (rated BB or less) widens, the gold price tends to rise. In this scenario, the market is perceived as more risk averse. And because gold is a haven, its price rises.
On the other side of the coin, gold prices tend to fall when the spread contracts.
4. The Retail Buyer
This is the most subjective of the gold indicators. Here, I measure the amount of interest retail buyers and sellers are giving gold.
When I notice more television and radio ads (and actual television shows) promoting gold, I suspect a top is forming. (Also take note when you see more kids standing on the street corner and twirling signs to promote gold.)
A rising promotional tide aimed at the retail buyer tells me we are approaching the saturation point, where there are few marginal buyers left to sustain the price trend.
Once the last retail buyer is in, prices fall.
What are these Gold Indicators Saying?
Not surprisingly, they’re saying gold is trending lower, and is likely to trend lower still.
Real interest rates are rising. Nominal rates have spiked over the past two months and money supply growth has moderated (and will moderate further when the Fed starts to “taper” its purchases of mortgage-backed and U.S. Treasury securities.)
The yield curve is neutral, though it has widened in recent weeks. That said, the yield curve isn’t holding much sway and a widening curve hasn’t help support the gold price.
Credit spreads are another story: In the past year, spreads have tightened considerably, dropping to below 500 basis points from 800 basis points. A tightening credit spread is a sign of more risk acceptance, which tends to depress the gold price.
As for the retail buyer, I believe he’s nearly all in, which also doesn’t bode well for the gold price.
So the immediate outlook doesn’t look good for gold. No big surprise there.
With that said, we don’t dislike gold. But we believe it can be bought more intelligently than simply taking a physical position or holding an ETF.
That’s why Ian Wyatt told you yesterday that he’s selling his position in the SPDR Gold Shares (NYSE: GLD). But he’s not abandoning gold.
Instead, Ian’s 100K Portfolio is recommending an intelligent way to buy gold in this market.
He’s recommending a “gold bank” – a company that provides capital for the most promising gold-mining companies.
It’s a unique opportunity because of a unique business model.
This “gold bank’s” agreements give it the right to buy roughly 125,000 ounces of gold this year … for as little as $220 per ounce. So even if gold prices continue to fall, the “gold bank” will continue to make money.
And rest assured, this “gold bank” makes money. In fact, it’s making so much money that it plans to initiate a dividend within the next 12 months.
Given the price trend and uncertainty surrounding gold, this “gold bank” just might be the most intelligent gold purchase you can make today.
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Buy Gold for $400 an Ounce
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