Everyone is bullish gold, and so am I, says Landon Whaley, but it is all about yield and the fundamental gravity.
Headline risks are everywhere, much like vacant storefronts in U.S. shopping malls. This week’s “Headline Risk” comes courtesy of the Old Institution and their predilection for not understanding what truly drives risk and return in financial markets.
J.P. Morgan strategist, Nikolas Panigirtzoglou, released a note recently explaining why gold is up double digits over the last few months. Panigirtzoglou cites data like the amount of annual purchases of gold exchange traded funds (ETFs) in metric tons, ETF holdings of gold in troy ounces, and the share of gold ETF assets under management (AUM) as a percentage of total worldwide funds AUM.
His conclusion?
Retail investors have driven the recent rally in gold.
Fundamental Gravity Says What?
As we have discussed on many occasions since we turned bullish on gold in August 2018, there is no better economic environment for gold than either a Fall or Winter Fundamental Gravity. In these growth-slowing regimes, gold averages a quarterly gain of 3.5% and posts positive returns 72% of the time.
There are many misconceptions about what conditions create a bull market in gold, so let’s clear the confusion up right now.
The reason gold performs well in these FG environments is because U.S. yields get the woodshed treatment when growth is slowing. Gold isn’t an inflation hedge, as many think. There have been plenty of inflationary periods for the U.S. economy where gold did diddly squat. And no Nikolas, the retail army can’t move a market as big and liquid as gold.
The primary driver of risk and return in any market, including gold, is the prevailing Fundamental Gravity. The United States has been in either a Fall or Winter FG environment since Q4 2018. Since Oct. 1, 2018, gold is up 61.9% with just a -12.5% drawdown. These stats compare very favorably to any other market on Earth, including everyone’s favorite equity benchmarks the Nasdaq 100 (+50.5% with a -28.6% drawdown for that period) and the S&P 500 (+19.7% with a -33.7% drawdown). This massive outperformance was all-FG driven, no matter what Wall Street folks tell you.
Markets Say What?
Gold is up 29% so far this year because U.S. yields have been getting treated like they’re on a dinner date with Hannibal Lecter. The 10-year yield is down -64% from the start of the year, and the 30-year yield has crashed -41%.
It’s important to note that gold has gained 19% since the beginning of March, even though yields have gone nowhere on a cumulative basis. This most recent push higher is proof positive that not only does gold perform well when yields are falling, but it also puts up big boy numbers when yields simply remain low. Once the 10-year breaks back below 0.50%, gold will trade like it was shot out of a cannon.
Slowing U.S. growth and declining yields are only two of the three heads of the hydra that will propel gold higher. The accelerant that would get gold on a rocket ship to the moon is further weakness in the U.S. dollar.
Right Said Fed
The Fundamental Gravity and market-related factors are all tilted in bullish favor of gold, but we can’t ignore the other critical aspect of trading: central bank policy. Fed Chair Jerome Powell and the boys and girls at The Fed are burning the greenback like a Salem Witch. The U.S. dollar has declined for eight straight weeks and is close to taking out the $90 level. The dollar is overdue for a countertrend bounce. When (not if) that bounce materializes, gold will experience its own countertrend move, and that correction will be a prime buying opportunity. You can bet your gold cufflinks that the Fed is going to continue to press until the 10-year yield goes negative, the dollar is trading with an 80-handle, and some form of yield curve control is implemented.
The Bottom Line
Mr. Panigirtzoglou concludes that “In all, whether we look at retail investors’ gold allocations or the [speculative] positions on gold futures by hedge funds, we see further room for the gold rally to continue."
Unfortunately, this knucklehead will be right, but for the wrong reasons.
Gold’s bullish momentum isn’t about retail capital flow or hedge fund positioning. Gold will continue to be one of the best-performing markets in the world because every aspect of the current Fundamental Gravity, from the dagum data to the trajectory of Fed policy, is conducive to being long gold. Period.
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