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.