The gold vs real rates chart is the one that tells the biggest story in this collection because it shows a relationship that held for 40 years quietly breaking.
Gold historically trades inversely to real rates. When real yields are high, gold underperforms because investors earn a return from bonds without the storage cost and zero-yield drag of holding bullion. When real yields are negative, gold outperforms because holding a zero-yield asset looks attractive relative to bonds that guarantee a loss in real terms. This relationship has been one of the most reliable in macro for decades.
Its broken now. Real rates are positive and rising. Gold is at all-time highs. Both things are true simultaneously which means something other than the traditional inflation hedge is driving the bid. The China gold purchases chart sitting right next to it tells you exactly what that something is. Central bank accumulation at this scale changes the demand structure of the market entirely because central banks are not price-sensitive buyers. They buy for strategic reserves diversification not for return, which means they absorb supply at whatever price the market offers without creating the sell pressure that would normaly cap a rally.
The miners-to-gold ratio at multi-decade lows is the chart I keep coming back to though. If gold is at all-time highs and the companies that mine it are trading at multi-decade lows relative to the metal they produce, the equity market is telling you it doesnt believe the gold price is sustainable. Either the miners are historically undervalued, which is the bull case for GDX and GDXJ, or the equity market is correctly pricing a gold reversal that the physical market hasnt registered yet. One of those two readings is wrong and figuring out which one is probaly the highest-conviction trade setup in commodities right now.
Great collection this week. The charts tell a more coherent story than any single one of them does individually.
The GDP and crude oil comparison chart has an interesting precursor. Though there are no years marked on the time bar, it looks to suggest a recent spike in Global GDP, at the same time as a sudden drop in Crude. It doesn’t look like Covid, that looks like the prior cycle to that (though it might be.)
I like that ending cartoon. Ah, yes. Welcome to the land of the fee and home of the knave.
I love that I have moved from Unconscious Incompetence to Conscious Incompetence as a result of your work.
🤣
I'm still investing in a precious metal: Pb, specifically 7.62x51 mm from Harnady.
Hornady. Fyac....
The gold vs real rates chart is the one that tells the biggest story in this collection because it shows a relationship that held for 40 years quietly breaking.
Gold historically trades inversely to real rates. When real yields are high, gold underperforms because investors earn a return from bonds without the storage cost and zero-yield drag of holding bullion. When real yields are negative, gold outperforms because holding a zero-yield asset looks attractive relative to bonds that guarantee a loss in real terms. This relationship has been one of the most reliable in macro for decades.
Its broken now. Real rates are positive and rising. Gold is at all-time highs. Both things are true simultaneously which means something other than the traditional inflation hedge is driving the bid. The China gold purchases chart sitting right next to it tells you exactly what that something is. Central bank accumulation at this scale changes the demand structure of the market entirely because central banks are not price-sensitive buyers. They buy for strategic reserves diversification not for return, which means they absorb supply at whatever price the market offers without creating the sell pressure that would normaly cap a rally.
The miners-to-gold ratio at multi-decade lows is the chart I keep coming back to though. If gold is at all-time highs and the companies that mine it are trading at multi-decade lows relative to the metal they produce, the equity market is telling you it doesnt believe the gold price is sustainable. Either the miners are historically undervalued, which is the bull case for GDX and GDXJ, or the equity market is correctly pricing a gold reversal that the physical market hasnt registered yet. One of those two readings is wrong and figuring out which one is probaly the highest-conviction trade setup in commodities right now.
Great collection this week. The charts tell a more coherent story than any single one of them does individually.
Check this out - this "silver miner" reached an annual high price today!
https://seekingalpha.com/symbol/SVM
Oh - seems the tide is turning.....
BK
The GDP and crude oil comparison chart has an interesting precursor. Though there are no years marked on the time bar, it looks to suggest a recent spike in Global GDP, at the same time as a sudden drop in Crude. It doesn’t look like Covid, that looks like the prior cycle to that (though it might be.)
What caused it?
The numbers are the months.
The blue range is the "output range" from the past 5 years (ie: roughly between 29 & 26)
The red line is the true average over the past 5 years.
And the green line is now - this year. (from 29 -> 21).
I'm sure everything's fine...
lesson no5 today.
Thanks
Love the last cartoon.
Not sure what to make of that gold vs Mag 7 graph...if I think the Mag 7 are over-valued does that mean I also think gold is overvalued??
It is a distinct possibility yes. Something to always keep in mind. Even as I believe everything I'm writing about, I still keep that in mind.