Hey There Income Hunters,
What a difference a month makes.
Last month at this time, 10-year rates were above 1.60%. Inflation, as defined by the consumer price index (CPI), was sitting at 3%.
When combined, those numbers totaled a -2.4% inflation-adjusted real rate of return.
This month, 10-year rates trended down to 1.45% and CPI rose to 3.75% … a -3.3% inflation adjusted real rate of return.
I’m always preaching about how closely gold tracks the 10-year real rate of return (that’s the 10-year interest rate minus inflation).
The real rate of return is extremely important for investors to monitor because the actual rate of interest earned is income that adds (or subtracts!) nest egg wealth.
Clearly, a negative real rate is a bad thing for investors who own fixed income. When real rates are negative, proficient investors sell their fixed income securities and buy gold … that’s why gold trends higher as real rates go negative.
So why is gold not breaking out right now?
Good question!
And I am going to show you why andhow this is creating the “underwater beach ball effect.”
Bank Gold Derivative Desks Pressuring Gold in Hopes of Getting Out
According to Harden & Co., an accounting firm in London, there is a total of 10,800 tonnes of gold derivatives supply that will be removed from the market between now and the end of the year thanks to European rule change.
This paper supply has suppressed physical gold prices and in the process supported U.S. dollar prices.
To that I say WOW, can you imagine where gold prices will go when this downward pressure is released?
Well the beach ball will be released on June 28 — and there will be no turning back for gold for years to come…
The Gold Discount
Let’s take a fresh look at where gold is now trading versus it’s highly correlated measurement, the 10-year real rate of return…
The last two CPI numbers have sent the real rate to -2.36% … and a new low or high based on the inverted scale above.
This correlation shows you how the internal market flows are impacting the market. Everything else is just noise.
The takeaway is, either we are going to get hit with deflation, causing a drop in CPI to justify undervalued gold prices, or gold is going to break out to the upside.
The deciding factor will be the June 28 Basel III rule change that will force an unwind of the gold derivatives market
This will unleash two bullish forces for gold…
- The investor money that will flow into GLD and physical gold to replace the unallocated derivative position that will have to be closed…
- And the stage will be set for gold to be free from price suppression. The central banks that have accumulated gold for years i.e. China, Russia, India, will rush to link their currency to gold and position for a spot at the new monetary system table.
Bring It Home
For much more on this and my trade of the year, join me and Mark Sebastian on Monday at noon Eastern as we discuss more details on the Digital Currency Arms Race and reveal the trade you NEED heading into June 28.
But you have to be a subscriber to attend!
Until then …
Live and Trade With Passion My Friends,
Griff