The 2-Year Gold Bull Market Has Started

The gold price has been consolidating for almost a year now since the peak of last August. I believe that this consolidation has ended and we are now going to start a 2-year bull market in gold.

The prime culprit for the weakness in gold was the rising 10-year bond yield which rose from 0.5% last year to 1.7% this year. This might not look like a lot, but in bond market terms this is a huge move. Gold is affected by rising real yields and a rising bond yield is not favorable to gold even though inflation is rising.

I believe the rise in bond yields is about to slow down as we see signs of deterioration in the economy. The U.S. unemployment rate inched higher in April of 2021.

Additionally, inflation is also hitting new highs. Producer prices hit a new high of 6.2% year over year in April. As producer prices rise, the costs will be passed on to the consumer and will likely lead to higher consumer prices.

As both inflation and unemployment are rising now, the misery index is going higher. This typically benefits gold as the misery index is correlated to gold.

We also took notice that the Federal Reserve is starting a new round of "Operation Twist 2.0". Operation Twist aims to manipulate the yield curve by selling lower maturity treasury securities and buying longer- dated ones. You could call this yield curve control. The allocation across the 7- to 30-year nominal coupon maturity range will increase by 3 percentage points, in line with shifts in the distribution of Treasury securities outstanding. The allocation to the shortest nominal coupon sectors and Treasury inflation-protected securities (TIPS) will decrease modestly. This yield curve control strengthens my thesis that bond yields will be capped going forward, benefiting gold. The 5-year TIPS yields have been moving lower and lower which correlates to higher gold prices.

The Federal Reserve also highlighted in March 2021 that it wouldn't hike rates until after 2023. The dot plot shows the probability of a minor 0.5% rate hike in 2023.

Institutions took notice of this change in events in monetary policy and have started buying gold via the GLD ETF. If you look closely at the chart below, you can see a rise in the net asset value of GLD which indicates that institutional investors are starting to get in the gold trade.

We are also seeing a shift in gold demand from China and India. SGE data shows that China's gold demand has doubled year over year and Indian customs data shows that Indian gold imports have done the same.

Another sign of tightness in the gold market is visible in the gold premiums for gold coins. APMEX gold premiums on gold maple leaf coins are standing at an all-time high of 8% right now. This typically indicates that gold is bottoming out and going higher. This tightness in gold is also visible in rising gold lease rates.

Moreover, it is a very good season to buy gold right now as June is typically the month where gold will start to rise for the remainder of the year.

In conclusion, everything is pointing upwards on gold. So how long will this gold bull market last? Charles Nenner believes this gold bull market has just started and will last for about 2 years based on his model on neural networks. I suggest investors to get in on this trade of a lifetime.