Wednesday, March 3, 2021

This Week's Message: What's Up With Gold? -- And -- Highlights From the Week Past

If you've been watching the price of gold lately, you might be wondering what's up, or why it’s down?

Allow me to answer with one simple 5-year chart.

Top panel is gold, bottom is the real yield (nominal yield minus inflation) on the 10-year treasury bond:

Talk about your near-perfect negative correlation!

You see, gold doesn't pay any interest, it just sits there, like a rock. So it's forever competing with safe interest-bearing investments, like treasury bonds. 

But gold's considered a serious hedge against rising inflation. Which of course explains that chart; when real yields (again, the stated yield minus inflation) rise, one gets more bang for one's buck -- all things equal -- out of the interest-bearing investment. 

And the cause for rising real yields has to be either falling inflation, or rising nominal yields -- or both.

Well, we certainly don't have both (falling inflation and rising interest rates). Instead we actually have rising inflation, and, justifiably (therefore), rising -- in accelerated fashion -- interest rates

So then, why do we still hold gold if nominal rates are rising at a pace that more than offsets rising inflation? 

Ah, frankly, it's a no-brainer -- given our thesis -- to the point where, if gold hadn't taken some back of late, I'd be feeling a bit uncomfortable right here. Meaning, I'm always a little anxious when we're positioned on the crowded side of the boat. And when I discover a "no-brainer" I want it to last -- i.e., I want the crowd to discover it later, after we’ve staked our claim...

You see, nominal rates, no way no how, cannot be allowed to continue their upward trajectory to a level that even comes close to their long-term average. I.e., we're sitting on the greatest debt bubble, and the most leveraged (in dollar terms) stock market, history has ever seen. 

Meaning, should inflation continue to rear its ugly head, and the bond market continue to act accordingly (selling off, pushing interest rates higher), the Fed will step in with all barrels and become the disinterested (in terms of not out to earn a profit) investor (manipulator) of last resort and buy those interest rates right back down to the proverbial floor. 

Then watch what happens to real yields, and, in all likelihood, to the price of gold. 

So we'll stay the course with our gold position until conditions and, thus, our ever-evolving thesis change.

I'll close this week's main message with a few highlights from all of our messaging over the past week:
"I've stated herein numerous times over the past year that stocks, and therefore the Federal Reserve -- given now massive leverage against stocks, and what amounts to a mammoth debt bubble virtually everywhere else -- simply can't do substantially higher interest rates.

Well, of course it's not just the U.S. central bank that bears such burdens; we're talking global phenomena.

Therefore, others are already stepping up to the plate, either in word or in deed:
The Bank of Japan waded in last night and bought up ETFs, the Reserve Bank of Australia announced an emergency round of bond purchases (QE), and the European Central Bank head said this morning that if rates keep rising they'll be stepping up support (QE) as well.
Make no mistake, this (and the oversoldness) largely explains this morning's rebound in treasuries and tech stocks. Interesting that not much else is going along for the ride just yet..."

"I can't emphasize enough the point Leon Levy emphasizes in the second paragraph below -- from his insightful book The Mind of Wall Street:
"It will not be easy for the apostles of the so-called new economy to nimbly adjust should the market decide that quaint old-economy obsessions such as earnings and dividends are important after all.

The message is that mood or investor psychology is as important to markets as is information. It requires tremendous discipline to apply this understanding to one’s behavior.""

"While, for sure, we should expect a surge in services, leisure and hospitality spending once things really open up, there's, nevertheless, real evidence that folks may not be quite as giddy about the notion as, say, Wall Street might have us believe."

"As we've been reporting herein, there are clearly actionable longer-term themes to be exploited in today's unique market setup, but like I said Wednesday, expect huge volatility going forward!"

"Per today's chart, commodity cycles tend to be long-term affairs:

Suffice to say that, after a 12-year major bear market, capacity in the space is historically thin. And, despite the recent rally (and, btw, we expect notable pullbacks for sure), commodities remain under-owned.
I.e., we think the recent strong breakout from the 12-year downtrend may indeed have long-term legs..."

"Being that we're essentially talking carts before horses; i.e., the spending that results from government transfers to folks' checking accounts, as opposed to the result of rising incomes due to increased productivity, well, all manner of imbalances, misallocations, bubbles (dare I say) will of course have to be dealt with by the markets in the months/years to come."

"The Fed for years has been efforting to create a little inflation. Now we're on the cusp of perhaps more than a little, and they've inflated such ginormous debt and equity bubbles to the point where they sincerely can't do a thing about them. I.e., there'll be no tightening of monetary policy as far as the eye can see -- and they'll claim that they see little (or only transitory) inflation the whole time.

Well, while transitory is indeed a possibility, inflation is nevertheless happening in the manufacturing space (big time!)."

""After 36 years of intimate engagement with markets and investors, I 100% sympathize with the following from the book on the elusive Jim Simons (likely history's best performing money manager), The Man Who Solved the Market:
"...popular math tools and risk models are incapable of sufficiently preparing investors for large and highly unpredictable deviations from historic patterns—deviations that occur more frequently than most models suggest."

"“What you’re really modeling is human behavior,” explains Penavic, the researcher. “Humans are most predictable in times of high stress—they act instinctively and panic. Our entire premise was that human actors will react the way humans did in the past . . . we learned to take advantage.”""

Thanks for reading!

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