Save Havens No More: Gold and Bonds Drop Despite
Rising Geopolitical Tensions
by the Curmudgeon with Victor Sperandeo
Gold & Commodities Drop due to Strong U.S. Dollar:
Gold futures dropped to an eight-month low on Friday, despite a boat load of geopolitical tensions that continue to heat up. December COMEX gold futures fell 0.6% to close at $1,231.50 an ounce. After the settlement, the price touched $1,228.10 - the lowest for a most-active contract since Jan. 10, 2014. Gold and silver were each off ~3% on the week.
Spot gold has fallen 6.8% since June, heading for its first quarterly loss this year. Even as the U.S. expanded sanctions against Russia and ramped up its military campaign to combat Islamic State (ISIS) in Iraq, investor interest in bullion has been muted. In other decades, especially when inflation is accelerating, gold is viewed as a hedge against a war that would disrupt the global economy. But not now.
Institutional money managers have pared their bullish bets on the yellow metal for three straight weeks. Meanwhile, open interest in COMEX gold futures and options is near the lowest in five years. This week, inflation expectations (as measured by the five-year Treasury break-even rate), reached the lowest since December 2013. Yet U.S. Treasury note and bond prices have fallen as well. Let's examine what others are saying:
“Gold is just not as appealing of an asset at this time,” Tim Evans, the chief market strategist at Long Leaf Trading Group Inc. in Chicago, said in a telephone interview. “The market is not expecting an inflationary environment for some time. The strength in the U.S. dollar and the strength in equity markets have attracted global capital. Those forces outweigh geopolitical tensions.”
The Trefis Team sites several Reasons for the Recent Decline in Gold Prices, which include: U.S. macro-economic data, strengthening dollar, easing geopolitical tensions, and the timing of a Fed interest rate hike. The article states: "A rate hike is likely to lead to a decline in the price of gold, as investors shift towards interest bearing assets."
“The hypothesis that the Fed is likely going to signal an increasingly probability of a (rate) hike is very telling,” Bart Melek, the head of commodity strategy at TD Securities in Toronto, said in a telephone interview. “Gold is not doing well.”
"Gold will clearly come under pressure as long as the U.S. dollar remains firm, and the fear that the Fed will raise interest rates and a ceasefire in Ukraine are also weighing," said Phillip Streible of RJO Futures.
Perhaps as a result of the strong dollar, the Bloomberg Commodity Index sank to a five-year low. The poor performance of commodities in recent months mainly reflects falling energy and agricultural prices. For example, Brent crude oil lost 1% Friday and has fallen almost 15% from its peak in June. Emerging market stocks have also been down for seven consecutive trading days.
Despite being off a bit on Friday, the U.S. $ Index (DXY) has been in steep uptrend since early July, as can be seen by this chart:
Analysts at Morgan Stanley Research said: “We see potential for U.S. dollar strength to broaden out, particularly if the Fed surprises markets with less dovish forward guidance next week.”
U.S. Notes and Bonds - 2 week drop is most since "Taper Tantrum":
Also on Friday, the yield on the 10-year Treasury note ticked up six basis points to a six week high of 2.61%. The entire U.S. Treasury complex surged higher in yield this week, rising 12-16 basis points (bps) while the 2 Year note miniscule yield was up 5 bps. U.S. notes and bonds have fallen seven straight days. The last 2 weeks were the worst for 10 Year T-Note since the June 2013 "Taper Tantrum."
[During a webinar this week, Doubleline CEO Jeffrey Gundlach said he expected the 10 year T-Note to trade in a range of 2.1% to 2.8% in the near future. He prefers stocks to high yield bonds for the "risk" portion of one's portfolio. More from Gundlach in Victor's comments below.]
High yield credit was the biggest U.S. fixed income loser this past week, despite mostly positive U.S. economic reports and consumer confidence.
Meanwhile, the U.S. dollar rose 0.5% - its 9th consecutive weekly advance - led by a 3% plunge in the Aussie $, 2% losses in the Japanese Yen and Canadian dollar (the Euro was unchanged on the week.
In today's inscrutable world of global finance, it's not unusual for inflation and deflation hedges to fall at the same time. But coupled with geopolitical instability and threat of war, one would think that either U.S. bonds or gold bullion would be a safe haven. Apparently not now!
Markets with the high degree of difficulty of the "Saturday New York Times Crossword Puzzle" or a "quadruple back flip somersault" can only be honestly analyzed from reading what the markets are saying, not what one thinks or expects.
Note that all of the 34 commodity, debt, and currency futures products I follow are in a downtrend except Cattle, Hogs, Oats, and the U.S. Dollar.
Therefore, this question seems quite appropriate at this time: What environment is in place where Gold, Oil, Commodities, Bonds, and Stocks all go down, while the U.S. Dollar goes up?
That environment is rising short term interest rates! Hardly a "single soul" writes about, predicts, or talks about rising short term interest rates from the FOMC.
Let's note one exception - a 9/8/14 San Francisco Fed Research report: Assessing Expectations of Monetary Policy, which states:
"Evidence based on surveys, market expectations, and model estimates show that the public seems to expect a more accommodative policy than Federal Open Market Committee participants. The public also may be less uncertain about these forecasts than policymakers."
Reuters reported that same day: "Investors expect the U.S. Federal Reserve to keep interest rates lower for longer, and to raise them more slowly, than the makers of U.S monetary policy themselves expect, according to research published Monday by the San Francisco Fed.
An article in
the 9/10/14 Financial Times (FT): Dollar Rises as Prospect Increases of Fed
Move, corroborates the above perception.
" ... the dollar has this week drawn its strength from developments in the U.S. Yesterday's ($) bounce came after the San Francisco Fed published research suggesting the market was underpricing the pace at which the Fed could raise rates once it begins....(later in the article)…The market has been very significantly low balling the timing and speed of U.S. tightening," said Steve Englander, a strategist at Citigroup."
This appears to be the first inkling that future Fed policy will not be as accommodative and market friendly as is now priced into various markets.
None of the typical market forecasters sees interest rates rising until the middle of next year at best. [Doubleline's Jeffrey Gundlach doesn't see short term rates rising BEFORE June 2015 and doesn't expect the Fed to ever sell the bonds it bought via QE, i.e. no exit strategy for the Fed]
Could they all be wrong?
Another possible reason for the strong dollar (and weak everything else) is the current intended devaluation of the Euro, similar to the policy of Japan's Abe (AKA Abenomics) to weaken the Yen.
Indirect QE is being accomplished in other ways by the ECB, such as negative ECB deposit interest rates and asset backed purchases from banks of loans made to businesses and individuals. This is a likely policy conclusion to help the EU with its "deflation problem" (if indeed there is one?).
The "powers that be" support this ECB policy as they believe it will preserve the "New World Order" from not dying a slow death. The European Union (EU) is a model of this scheme to have "World Government," but if the EU blows up, so does the "New World Order." If so, many bad things are predicted, especially the loss of jobs of the EU commissioners. [In my humble opinion, such a "New World Order" is undesirable, as it results in loss of individual freedom and national sovereignty.]
This is the current reality of the Eurozone (and the Euro). Europe's politicians won't even consider tax cuts to stimulate economic growth. Instead, they are going the route of Abenomics to pursue their "New World Order" vision.
The economics of austerity are literally fading away the growth and freedoms of the people of the EU. Wolfgang Munchau writing in the 9/8/14 FT: What Draghi must do next to Fix Europe's Economy illustrates this mentality:
"When European politicians talk about fiscal flexibility they do not mean big tax cuts or an investment program. Flexibility is about how to frame the next steps of austerity, whether you cut your expenditures this year or next."
"If this does not work, the second best option would be to use the maximum amount of monetary policy action: a quantitative easing program to buy government and private sector securities; and a restatement of the inflation target to make the commitment to a higher inflation target more credible. These would be my preferred policies."
Do you think that massive amounts of QE will compensate for fiscal austerity?
I suggest that anything you read or hear from the EU that gives it more power is not to be believed as valid or honest. A telling example of this are the words of the new President of the European Commission Jean-Claude Juncker. He evidently believes in lying as a legitimate political strategy.
On April, 21st, 2011, Juncker explained his understanding of political integrity at a conference: Referring to the way he and the EU deals with the Euro crisis and the financial markets, he said: “I have to lie. I’m a Christian democrat and a Catholic, but when it becomes serious, you have to lie."
The Socialist Workers Party backed Juncker.... You have to love it? Honesty about dishonesty makes a leader proud.
Thereby, you can expect all the Eurozone stories will be orchestrated to drive down the Euro to create more exports and growth for EU countries via a relatively cheaper currency.
One may conclude that "the fix is in" for the Euro to decline versus the dollar, as blessed by the EU/ECB leaders and Fed Chairwoman Janet Yellen. Of course, in the longer run this is like "kicking the can down the road again...." [Resolution of today's problem is put off to some future day...or never.]
Technically, when the U.S. dollar rallies, it is automatic for traders to sell commodities, including all the metals, oil, and gold (which are priced in dollars). I believe this has less to do with some recent good U.S. economic news, (e.g. retail sales +0.6% vs. an expected 0.3%) as the economic news is mixed at best.
As Mick Jagger so aptly put it in "Gimme Shelter": "Oh, a storm is threat'ning, My very life today, If I don't get some shelter Oh yeah, I'm gonna fade away"
Here's an appropriate quote from Leo Tolstoy:
"I sit on a man's back, choking him and making him carry me, and yet assure myself and others that I am very sorry for him and wish to ease his lot by all possible means - except by getting off his back."
That should ring a bell to European heads of state and the ECB. Will they get the message?
Shadowstats' John Williams: Physical Gold, a Life Preserver That Could See Action Soon:
Not everyone is bullish the U.S. dollar and bearish on gold and commodities. Despite the recently strong dollar rally and declining prices of gold/silver/commodities, Williams wrote in a note to subscribers:
"Renewed and intensifying weakness in the U.S. dollar will place upside pressure on oil prices and other commodities, boosting domestic inflation and inflation fears. Domestic willingness to hold U.S. dollars will tend to move in parallel with global willingness, or lack of willingness, to do the same. Both dollar weakness and the resulting higher inflation should boost the prices of gold and silver, where physical holding of those key precious metals remains the ultimate hedge against the pending inflation and financial crises."
Till next time......
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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