Should the dip be bought?

Gold prices rose 2.57% last week as markets firmed up the $1700 support level for gold. The question everyone wants to know is, ‘should you buy the dip’? Here is what you need to know.

The USD is falling

The last Fed meeting showed a dovish move as the Fed moved to a meeting-by-meeting basis. The Fed recognised slowing growth in the US and the markets took this to mean that the Fed would potentially slow the rate of hikes if the US economy started slowing. Technically the US is in a recession, so any metrics that show slowing growth may cause investors to think the Fed may be more patient around hiking rates.

The impact of falling real yields on gold prices

On the chart below we are using a TIPS (Treasury Inflation Protected Security) as a proxy for real yields. This is because they behave in virtual lockstep, but the TIPS is updated during US hours. Real yields are only updated once a day, so it is less useful for trading. The key aspect to notice is that as real yields have been falling (blue line), gold has been rising. See the chart at the top.

What you need to know about stagflation

If inflation expectations keep rising and growth expectations keep falling then that is normally a good environment for more gains in gold. This is a stagflationary environment. In this situation, you can expect the following general reaction in the markets.

So, if growth keeps slowing, but commodities keep rising, then gold may be bought on dips until that relationship changes. The main risk to this outlook is if growth remains robust and inflation keeps gaining. In this environment, it could be possible for gold to see another leg lower.