Macro Dragon: Dissecting Gold part II of III... The Bull
Global Macro Strategist
Summary: Macro Dragon = Cross-Asset Daily Views that could cover anything from tactical positioning, to long-term thematic investments, key events & inflection points in the markets, all with the objective of consistent wealth creation overtime.
Macro Dragon: Dissecting Gold part II of III... The Bull
Top of Mind…
- We touched on The Bear’s view on gold here – primarily founded on “arcane shiny rock”, no yield, has not been acting as hedge against risk-off, Dollar will be stronger for longer & we’ll have a backdrop of positive real rates given the deflation global storm post the Covid-19.
- Of our three drinking compatriots – The Bear, The Bull & The Dragon – It’s The Bull’s turn to weigh in…
The BULL on Gold...
- So on your “arcane & outdated shiny yellow rock” – there is a reason that gold has been used as a medium of exchange for thousands of years, with some evidence even going back to 40,000 B.C. Two of the likely underlying facts here are scarcity value, as well as unlike ALL FIAT currencies that have ever existed, one cannot debase gold. You cannot print more gold, even though I am sure there are central bankers who stay up at night going through ancient alchemic texts…
- Everyone is always look for the latest bestselling books, but it’s the books that stand the test of time that should be the priority in one’s reading. Same thing with asset classes, its asset classes that stand the test of time, that one should consider for their portfolio. Keeping in mind that different assets rise & dip depending on the economic regime.
- The Bear pointed out two big periods of gold drawdowns: two during the GFC (2H08, -25.4% in 42D & -26.65% in 10D) & of course, one in mid-march of this year (c. -15% from top to bottom tick 1703.39 / 1451.55 in 5D).
- Taking those in reverse order, the moves in mind Mar were purely & simple near-term technical & operational liquidation moves… on the day that gold hit its initial high of 1703, USTs hit the 31-32bp range & oil closed down -25%. When you have such liquidation moves, asset classes tend to always converge towards a correlation of 1, as its not about fundamentals or an investment thesis – its just a rush for liquidity & its like a stadium of people trying to get out through a keyhole.
- Still we’ve rallied to new highs since that 1451 lvl, for a c. +20% move to 1747 & are still up +17% consolidating around these 1700 lvls.
- Going back to the GFC, The Bull would argue that 2H08 was still a liquidity over any price/fundamentals consideration. Yet post the 682.57 low on 24 Oct 08, Gold climbed c. +50% in just 85 trading days, before clocking +80% in early Dec 2009 (289 trading days). And those are unlevered returns.
- The biggest drawdown during the c. +50% to +80%, 85 / 289 trading run was c. -14%. Its worth also noting that the DXY did not peak until 6 Mar 08, by which point gold was already up c. +50%. That also coincided with the low in the S&P 500.
- The astonishing thing to The Bull, is that Gold Positions (based on the CoT, see Ole’s latest cut) have been staying put for the past 6wks along the 180-200K… and its still currently only 63% of its 54wk high of 292K. So why is this astonishing?
- Simply put we are in a QE infinity world & everyone is playing the game, its no longer jus the Fed, the ECB & the BoJ. The RBA is game, as is RBNZ as well as now Emerging Markets such as South Africa. Yet the Fed reigns supreme in both magnitude & speed of their initiatives to underwrite parts of the economy, as well as help fund the treasury (read trump, i.e. Trump > US Treasury > Fed).
- We can say with literally 200% certainty that government debt is only heading one way in the US and that’s up – all the measure to date +$1.7 trillion & counting, are not stimulus measures, they are stability measures at best, yet more accurately “relief” measures. We are going to move to the biggest unemployment in the US since the 1930s depression (as of last Thu, in just 6wk we have seen +30m American workers file for jobless benefits), and the biggest budget deficit since WW II - i.e. Obi’s -10% of GDP is going to look like another world, we are likely talking a -25% to -35% deficit before this is over.
- Not to mention, that’s not even taking into account that this may turn out to be a long drawn out recession – there is no credible, mathematical sound pathway to a V-shaped recovery. Again the Fed can print money for liquidity & buying up of listed assets. But the Fed cannot print jobs, it cannot print oil storage, it cannot print demand, it cannot print consumption, it cannot print corporate CAPEX.
- In Jan 2020, we had the BoJ’s BS at +100% of JP’s $5 trillion Economy, with the Fed’s BS at c. 25% of the US’s $21.1 trillion economy. The Fed has already clocked over 30% (without even accounting for the contraction in the economy) in a few weeks & there is more to come – them getting to at least 50% of US GDP is not an aggressive expectation.
- Just for context, between Apr & Jun, there will be +$3 trillion printed by the Fed for the US Treasury. That’s a staggering number. That’s c. 15% of the US’s Jan 2020 GDP of $21 trillion, that c. 30% of the $10.9 trillion value of gold globally (based on 200,000 tons @ $1700). That’s 264% of the 1.84 trillion of US Dollars in circulation.
- Which brings The Bull to the point that, there is no way the Fed (& treasury) can let yields or rates go up - which is great, as that’s normally been structural head winds for gold. Nor can they have real rates be positive. Point being, under either or both of those scenarios, the cost & magnitude of the debt on the Fed’s & US governments balance sheet is going to actually grow.
- What they will do is print more money, issue more debt, and keep real rates negative – so the overall real debt burden is structurally falling. This was also something we saw in 2008, where real rates went negative for years post the GFC. And it does not matter what the underlying inflation is, because at the end of the day… when your debt burden is so large & growing, you cannot digest the interest payments on that debt – this is the end-game that Japan & the BoJ have found themselves in, the negative rates world (which is still a very real possibility in the US despite the conventional view that it could never happen in the US of A, because of the key rate of the Fed. Stay tuned folks, stay tuned… there are no rules, that cannot be re-written by the politicians that write the rules.
- Remember there is zero accountability & skin in the game for central bankers, as well as fiscal / monetary policy makers. They move on to write their books & collect 6 figure speaking fees. We tend to get what we incentivize for & that is why the world is where it is today.
- The amount of QE Infinity this time around from the Fed, is completely on a different universe from the GFC, we are doing in days what was done in months. From 2008, it took the Fed 4yrs to increase its balance sheet by +$3 trillion, this time around we are doing that in sub 4 months. And this is only post the initial Fiscal (yet Fed backed) support of $2.7 trillion ( c. 13% of US Jan GDP).
- With the position being light in gold from a multi-year horizon & pension funds estimated to have less than 0.15% allocated to gold, the upside should be colossal. $2,000 by year end, is a doable, a +18% move from these $1,700 lvls, with a 12-18m target of at least $4,000.
- Don’t’ forget we are still well south of the 1921 ATH highs in gold from Sep 2011, a +13% move from $1700.
- Also at some point we will get a structural weakening of the USD - whether its sharp & forced by the Treasury (read Trump) - or gradual as the world returns back to some semblance of normality, this will be a huge tailwind for gold.
- Again if we ignore the increased magnitude of debt & overall epic debasement on the fiscal & monetary front, & just focused on the precious price moves from the lows in 2008 (i.e. +50% in 85 trading days & +80% in 289 trading. The using the recent 1451 low, that would imply a potential range of +$2,176 to 2,612, which is c. +28% to +54% un-levered from this consolidation lvls of $1700.
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