Gold has effectively been range bound for two years after its initial breakout in 2016, and currently it's having a horrendous struggle trying to meander back above $1,200. The average gold bull continues to look out into the ether on why prices should be rallying.
The common misconception is that gold is a catch-all safety asset, and it is not. So, don't make it one. The overarching trend doesn't care about China, Stormy Daniels or whatever headline that hits the wires next.
Here is a few tips what is currently affecting gold prices:
Dollar funding rates continue to rise causing extreme stress within the eurodollar system: 3 month libor rate is 2.33 percent, up 77 percent YoY. This acts as a great leading indicator to dollar strength.
The stronger dollar pressures the $11.5 trillion in dollar-denominated debt currently outstanding. This causes a tremendous risk for emerging markets - think Turkey, South Africa and Brazil. China does have exposure to this risk but it is not immediate.
I was able to front run the emerging market collapse and dollar rally through an amazing data point nobody ever looks at: real yields. There is a strong inverse correlation to gold and real yields; and higher real yields support increased inflows into the dollar.
The break out of real yields during the later half of 2017 wasn't even mentioned. Note: gold's inevitable collapse in 2012 came when real yields bottomed neat -167 bps and began to drift higher. Currently at 90 bps, if the real yield reaches 125-150 bps gold could trade below $1,000.
Here is a close up of real yields and the DXY/gold ratio:
The VIX won't save you. There is a disingenuity of perma-gold bears. They say "look the VIX is rising but gold isn't. Gold is useless." There is a frustration with bulls that the VIX is up but gold is not. They are not directly correlated. In 2008, the VIX jumped couple hundred percent while gold dropped over 30 percent.
In addition to the above point, under times of extreme stress gold is used as a liquidity gap or immediate funding source. Gold is sold into the market for dollars, euros, whatever.
Turkey sold almost $5B in gold reserves at the end of last week to help stem their liquidity gap. It won't be enough, but as the emerging market rout continues, this could be commonplace.
China's immense hunger for gold has less to do with dethroning the dollar and more to do with funding future liquidity gaps IMO. With banking assets roughly 320 percent to GDP, the asset mismatch is almost 3.5x larger than the 2008 financial crisis. Australia's banking assets to GDP is nearing 300 percent. If gold is utilized as it has in the past, the pricing pressure will be immense.
Those are just some sort and long-term ways to be dynamic about gold prices. It is first predicated on real yields and the U.S. dollar and then as a liquidity stop gap.
Interestingly enough, the next recession could be so cataphoric (considering corporate and consumer debt) that the Average Joe and Jane would have to sell their gold (after their 401(k) if they have it) for their own liquidity gap.
If you agree or disagree, please let me know in the comments! Also, be kind and share this on Twitter or other platforms.
-TMS
The common misconception is that gold is a catch-all safety asset, and it is not. So, don't make it one. The overarching trend doesn't care about China, Stormy Daniels or whatever headline that hits the wires next.
Here is a few tips what is currently affecting gold prices:
- The dollar is heading higher on a combination of central bank policy divergence between the Fed and the rest of the world. September and December hikes are inevitable. There is an unlikelihood to see any hawkishness out of other G10 central banks, especially considering the eurozone and U.K. are slowing economically.
Dollar funding rates continue to rise causing extreme stress within the eurodollar system: 3 month libor rate is 2.33 percent, up 77 percent YoY. This acts as a great leading indicator to dollar strength.
The stronger dollar pressures the $11.5 trillion in dollar-denominated debt currently outstanding. This causes a tremendous risk for emerging markets - think Turkey, South Africa and Brazil. China does have exposure to this risk but it is not immediate.
I was able to front run the emerging market collapse and dollar rally through an amazing data point nobody ever looks at: real yields. There is a strong inverse correlation to gold and real yields; and higher real yields support increased inflows into the dollar.
The break out of real yields during the later half of 2017 wasn't even mentioned. Note: gold's inevitable collapse in 2012 came when real yields bottomed neat -167 bps and began to drift higher. Currently at 90 bps, if the real yield reaches 125-150 bps gold could trade below $1,000.
Here is a close up of real yields and the DXY/gold ratio:
The VIX won't save you. There is a disingenuity of perma-gold bears. They say "look the VIX is rising but gold isn't. Gold is useless." There is a frustration with bulls that the VIX is up but gold is not. They are not directly correlated. In 2008, the VIX jumped couple hundred percent while gold dropped over 30 percent.
In addition to the above point, under times of extreme stress gold is used as a liquidity gap or immediate funding source. Gold is sold into the market for dollars, euros, whatever.
Turkey sold almost $5B in gold reserves at the end of last week to help stem their liquidity gap. It won't be enough, but as the emerging market rout continues, this could be commonplace.
China's immense hunger for gold has less to do with dethroning the dollar and more to do with funding future liquidity gaps IMO. With banking assets roughly 320 percent to GDP, the asset mismatch is almost 3.5x larger than the 2008 financial crisis. Australia's banking assets to GDP is nearing 300 percent. If gold is utilized as it has in the past, the pricing pressure will be immense.
Those are just some sort and long-term ways to be dynamic about gold prices. It is first predicated on real yields and the U.S. dollar and then as a liquidity stop gap.
Interestingly enough, the next recession could be so cataphoric (considering corporate and consumer debt) that the Average Joe and Jane would have to sell their gold (after their 401(k) if they have it) for their own liquidity gap.
If you agree or disagree, please let me know in the comments! Also, be kind and share this on Twitter or other platforms.
-TMS
