Gold Price Hits Another 2019 High - Setup For Long-Term Rally By XAU/USD

The gold price rally in June has led to one of the strongest performances (thus far) by bullion in recent memory. In fact, with gold prices up by 8.73% in June 2019 at the time of writing, you have to go back to June 2016 (8.74%) in order to find another performance as strong as the one we’ve witnessed so far this month.

There are numerous factors driving the gold price rally, but at the root of them all lies the US-China trade war. The prospect of the world’s two largest economies engaging in a tit-for-tat tariff standoff has already started to cool global growth, and now Federal Reserve policymakers, led by Fed Chair Jerome Powell, are signaling to financial markets that they are ready to cut interest rates if necessary. Indeed, per the June Fed meeting, eight FOMC policymakers foresee lower interest rates by the end of 2019.

GOLD PRICE RALLY BEING DRIVEN BY FALL IN US 10-YEAR TREASURY YIELD, US DOLLAR

With FOMC policymakers’ forward guidance pointing to lower interest rates in the future, US Treasury yields have been steadily eroding in recent weeks, with the US 10-year Treasury yield dropping below 2.000% for the first time since November 2016 – a precipitous decline of more than 100-bps from where it stood in November 2018.

As has been the case for several weeks now, the ongoing decline in US Treasury yields amid speculation that a Fed rate cut cycle is about to begin has been fundamentally bullish for gold prices. With inflation relatively stable around the Fed’s medium-term target of 2%, the drop in nominal US Treasury yields has created an environment where real US yields are falling, undermining the US Dollar in the process.

Historically, falling real US yields and a weaker US Dollar have been paramount to periods when gold prices have rallied. In recent weeks, these relationships have proven valid: the 20-day correlation between gold prices (via XAU/USD) and the US 10-year Treasury yield is -0.82 (i.e. as yields fall gold rises); and the 20-day correlation between gold prices (via XAU/USD) and the US Dollar (via the DXY Index) is -0.76 (i.e. as the US Dollar falls gold rises).

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