We’ve been devoting a lot of attention in recent weeks to our highest conviction bull case … US Treasuries. Let’s talk a bit about our other favorite … gold. We haven’t generally been bullish on either of these asset classes for quite a while and have been outright bearish more recently. That’s in flux.
The latest SS outlook is bullish on gold almost as far as the eye can see, with a very short term bearish caveat that we can see in play today. But there’s also a solid fundamental case.
The US dollar and US Treasuries make up the biggest competitor for investor dollars to gold. As Treasuries have become cheaper so have they become more attractive competitors. The issuer of the US Federal Reserve Note (aka the US dollar) has been promising to support its value and more recently been taking steps to back the talk up with action. The market has recognized these developments in a big way, as can be seen in the SS Bills plot, which mostly reflects a bull market in USD. The same bullish activity is seen more directly in the FDI.
The attractiveness of USD and UST won’t last forever though. As the year wears on and a “slowing economy” begins to eclipse consumer price inflation as policymakers’ main concern, and bond prices rise, USD and UST gradually lose some of their appeal. Gold shines brightest when its competition doesn’t.
6 thoughts on “Gold”
Systems is amazing, Bill. I’m taking advantage of this little Boo-Boo bear market in gold.
It looks like we might be setting up for another “Lehman Moment” when gold dropped right before everything blew up, after which gold and treasuries were the only assets to perform.
I’ve read that U.S. banks are in better shape than they were pre-GFC but European banks are NOT. Right on cue, perhaps, credit default swaps on Credit Suisse have skyrocketed to levels not seen since the GFC.
Interesting times for sure!
Thanks, Shiny! The best way to sum up Synthetic Systems I think is usually pretty good, sometimes astonishingly accurate, and sometimes badly wrong. In my investing I make a point to consider all the evidence including fundamentals and valuations, as well as SS, and always keep at least some exposure to each of the asset classes, and most of the time depart only moderately from my neutral mix. Once in a while all these subjective factors line up with SS and I take a more assertive position.
One such example was around the beginning of the year when SS had a very bearish outlook on medium-long term Treasuries and my assessment of the fundamentals aligned with that too. I slashed my Treasuries allocation down as far as prudence would allow in favor of cash, then gradually raised it to neutral and more recently overweight. That turned out to be a good trade.
It remains to be seen how the current outlook pans out, but I feel pretty comfortable being overweight in Treasuries and gold. I still have some stocks and other shiny stuff like copper, silver and platinum, and a sizable portion of my equity allocation is in realty, some of which tends to correlate with bonds and some of which tends to correlate with commodities including food and energy. That should benefit nicely if the SS outlook pans out without being devastating if it doesn’t.
It’s not clear exactly where a Lehman moment might come from but the background is ripe for one. Years of ultra low rates have encouraged a massive buildup up debt, tinder just waiting for a spark.
I’m not worried about the banks … more like the “shadow” banking system and other parts of the financial world where things have a way of popping up in places you’ve never even heard of. Even without an “event” though you still have housing price inflation and an overvalued US stock market that even after these declines doesn’t offer much in the way of long term prospects. There is really no pain free way out of the years of interest rate repression capped by a shockingly reckless Fed even long after the initial covid crash was over and equally shockingly bad policy from this administration and congress, especially in paying people more to not work than to work, then crushing our domestic energy industry, and finally throwing a wrench into the gears of the global financial system in a stupid and self destructive attempt to support NATO imperialism and punish Vladimir Putin and anybody even remotely associated with him. If I had sat down and deliberately tried to devise a policy plan to destroy America I would have been hard pressed to come up with a more toxic cocktail.
When policy errors like the Fed’s ultra low rates over the last 20 years and the political/economic policies you describe above are 100% one-sided in their salubrious effects for one group and deleterious effects for others, then they are not errors. A tossed coin cannot land on it’s head 6,493 times in a row. Not unless it’s weighted.
Systems’ take on gold looks reasonable for so many real-world reasons. I don’t think you can go wrong with gold at this point.
Still watching to see how energy plays out with Systems’ forecast. There’s a tug-of-war with “the physical oil market is pricing in scarcity while the financial oil market is pricing in recession.” Oil is in one of its strongest backwardations ever while oil equities are falling. But this probably belongs in a different thread.
Agree. I’ve never really tried to precisely apportion the blame between incompetence and malicious intent, but believe policy this bad has to involve more than a little of both. (Note my last sentence above…) Far as oil is concerned, the picture isn’t clear (who said investing was easy;-). Even the SS Copper plot has been weaving around, at least in the nearer term. I suspect though that by the time that Copper plot has bottomed, oil prices will be a fraction of their current levels.
That would require something catastrophic.
If by catastrophic you would include a GFC-like scenario then it’s far from out of the question. Think back to this time in 2008. Oil prices were hitting $147 a barrel and predictions for $200 and higher were routine. Everyone was convinced the world was running out of oil. On iTulip I started a thread “The Last Time We Had Peak Oil” where I argued at great length that the apparent fundamentals weren’t as fundamental as people thought. I won few converts. But within six months oil was trading in the $20s.
I’m not necessarily forecasting a repeat, but I am convinced that high oil prices are not nearly as much due to the oil story as widely portrayed. As a wise man once said, inflation is always and everywhere a monetary phenomenon.