Goldilocks Pivots
What a difference 2 weeks makes.
Investors did not even bother to stop and consider why the US Fed policy makers made such an aggressive policy pivot last week, they just bought all the things. It’s not like the US Fed had an alarming set of inflation or job numbers, consumer sentiment is fine (according to .gov stat wonks), in fact, the way the “everything is awesome” goldilocks numbers are continually rolled out, it’s a wonder rates aren’t still going up.
As has been the case since 2008, markets were just waiting for signs of stress or brokenness as guidance to the inevitable Fed pivot. So, what broke? Massive bond losses on bank and insurer books starting to concern regulators? Rates hurting an over indebted real economy? The US political cycle, Central bank credibility, which for the average investor is pretty much shot anyway. The mystery will be sure to be revealed over the next few months.
What about those inflation concerns? Do not forget, inflation is a feature, not a bug, even when you’re being told there is very little inflation and it’s coming down, one’s own cost of living skyrockets. Honestly, we think it remarkable that rates got to where they are given global debt loads. All central banks, as mentioned above, were always going to accommodate overleverage and let inflation run with fiscal and monetary accommodation, despite their desperate words to the contrary.
Meanwhile, the minor matter of another trillion in debt was added to US.gov over the last 3 months. It’s only on track for a 4 trillion increase in the next 12 months which should take it to a manageable 38 trillion by the end of 2024. And that’s if nothing goes wrong!
Investors are correctly readying themselves for an inflationary fire hose of accommodative liquidity and rate cuts to support the “system”, a debt and derivative system that should have been reformed in 2009, instead of 100% commitment to more of the same. The end game, which has been true for every debt cornered nation, kingdom, or “democracy” in history (at least from ancient Rome to today) will be the same: save a broken system by killing its currency. Killing a currency? Which one? Most Western Central banks and govs are running the same policies. Against what, one should ask?
Investors should find it remarkable Gold had held its own over the entire recent rate tightening period. Or more to the point, Gold seems to hold its value, period. This has always been so over the long haul. Gold equities, well, not so much, until they take off, more on that down the page.
Some reasons remain as to why it may be gold has held its value through the most recent rates rise cycle:
- Systemic risk remains elevated.
- Gold is now (as if it wasn’t always) a Tier 1 asset under Basel 3.
- Central bank (particularly BRIC nation) demand for real bullion remains robust at 2.5x 2021 level and 4x 2020 levels.
- Gold ownership by investors in the “West” remains at multi decade lows
- Trust in UST’s (US Treasuries), the most “pristine” of collateral, continues to wane.
- Government “largesse” (commitments) is about to reach EU levels of largeness, whereby the government contribution to GDP overtakes private, killing the real economy.
- Before 2008, no none could envision a trillion-dollar deficit in the US, then it became commonplace, a 5 trillion amount would have seemed impossible pre covid and now 3 to 5 trillion in a recession won’t bat an eyelid in the US and EU.
Despite all the obvious reasons for investors to hold the other most pristine collateral in the system there are a few reasons, other than it being a barbarous relic, not to own it. We love the reason talking heads on MSM use when they say, “there is not enough to go around”. We say, “well, not at this price”!!
The other main issue holding investors back is the dreaded “volatility”. On this point we say, is there any wonder. Varied sources put gold paper (derivative) claims to physical availability at around 100 to 500:1. Yes, the financial “casino” provides enormous leverage, ON EVERYTHING.
The problem with precious metals is that many investors undertake gold investing for all the right reasons yet choose to allocate fund exposure using ETF type derivatives, for “liquidity”!!. We won’t open that entire pandoras box today but hope you understand what these investors claims are on.
Below, is a classic example of some off putting volatility. What happened 2 Sundays ago, Monday morning Australian Western Standard time (the quietest time for gold trading) was outstanding.
Gold hit a new (nominal) record high at $2135…
Followed by……..
Simple profit taking at the casino royale?
…within the next 8 hours, spot gold prices had dropped $115 from its intraday highs…
…that is the 6th biggest absolute $ intraday drop in the history of spot gold trading (9/23/11 & 9/26/11 (SNB intervention as gold soared near $2,000), 04/15/13 (taper tantrum), 3/16/20 (COVID lockdowns), 08/11/20 (vaccines))…
Anyway, facts remain……
Most certainly, we are yet to have Gold’s price breakout confirmed by gold stocks.
But remember this, golds 30% rise off pandemic lows was accompanied by 110% rises in major mining stocks and 150% rise in juniors.
Lots of catching up to do.
With Gold supply potentially in long term decline:
With global gold allocation slightly above 1% of global assets under management, it’s fun to think what would happen to gold and gold miners if it ever went close to the 1980 peak of 8+%, or even just to 2% from 1!
And finally, for those considering other macro themes for 2024 portfolio management we hope you find the following summary of Global Forecast Series 2024 Investing Playbook of use.
Peace.
