Gold Bugs Put Foot Down Last 2 Weeks, Hoping Cooperation From Real Yields Ahead

One week does not make a trend, but non-commercials’ action is worth watching, as more often than not the green bars and the red line in the chart tend to move hand in hand.

Also worth watching is how flows into GLD (SPDR Gold ETF) behave.

On March 16 last year, gold bottomed at $1,450.90 and went sideways until the 20th before it began to rally hard. This was also a time when equities and interest rates bottomed, with the S&P 500 large cap index bottoming on the 23rd and the 10-year treasury yield reaching 0.4 percent on the 9th. It was also on the 23rd when the Fed announced unlimited QE and said it would begin to buy investment-grade corporate bonds, which in April was expanded to also include junk bonds (SPX, SPY, SPTL).

As gold began to rally, GLD flows persistently remained in the green (arrow in Chart 3). Then, come August, the four-week total began to turn red, which not only persisted but also got bigger.

From gold bugs’ perspective, the only consolation is that the outflows trend of late has improved. In the four weeks to last Wednesday, GLD lost $387 million – versus withdrawals of $1.6 billion in the week to February 25.

Amidst all this, depending on what transpires in the interest rate arena in the coming weeks could make or mar gold sentiment.

Rates on the long end of the treasury yield curve are perking up. Short rates are behaving, but the 10-year yield for instance has now rallied for eight weeks straight. Rates bottomed last March and gradually trended higher. In early January, the 10-year broke out of one percent, followed by 1.2 percent mid-February, 1.4 percent late that month and 1.63 percent last week (Chart 4).

Markets want the Fed to step in and stop the rout in long bonds – maybe some form of Operation Twist, in which the central bank buys on the long end and sells on the short end. But the Fed already spends up to $120 billion a month to purchase mortgage-backed securities and treasury notes and bonds. Last March, it held $4.2 trillion in assets, which have now grown to $7.7 trillion.

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