Gold: Logic Vs. Emotions, True Vs. Temporary

Please see below:

To explain, the green line above tracks the U.S. 10-Year Treasury yield, while the red line above tracks the U.S. 10-Year breakeven inflation rate. If you analyze the left side of the chart, you can see that when the material gap finally filled in 2013, the U.S. 10-Year Treasury yield’s surge was fast and furious. Likewise, if you analyze the right side of the chart, you can see that the gap between the two is even larger now. As a result, with material divergences often reversing in a violent fashion, the next surge will likely be no different.

To that point, the FED released its semi-annual Financial Stability Report on May 6. An excerpt from the report read:

“High asset prices in part reflect the continued low level of Treasury yields. However, valuations for some assets are elevated relative to historical norms even when using measures that account for Treasury yields. In this setting, asset prices may be vulnerable to significant declines should risk appetite fall.”

On top of that, FED Governor Lael Brainard had this to say about the current state of affairs:

 Source: U.S. FED

For context, a “re-pricing event” means that if the U.S. 10-Year Treasury yield reconnects with the U.S. 10-Year breakeven inflation rate above, we should prepare for an explosion.

If that wasn’t enough, Boston FED President Eric Rosengren told an audience at the Boston College Carroll School of Management on May 5th that the housing market remains on high alert. For context, the FED currently buys “at least” $40 billion worth of agency mortgage-backed securities (MBS) per month.

Please see below:

 Source: Bloomberg

The bottom line?

With euphoric valuations and surging inflation on a collision course of destruction, even FED officials are sounding the alarm. And with the PMs’ recent rally underpinned by falling real yields and investors’ joyful exuberance, sentiment will sour rather quickly once the FED is forced to reduce liquidity. Case in point: following historical recessions since 1970, the U.S. 10-Year Treasury yield often rallies sharply, consolidates, and then continues its trek higher.

Please see below:

Source: Arbor Data Science

To explain, the orange line above tracks the average performance of the U.S. 10-Year Treasury yield during global recoveries since 1970, while the blue line above tracks the performance of the U.S. 10-Year Treasury yield since August 2020. If you analyze the middle of the chart, you can see that the U.S. 10-Year Treasury yield is likely exiting its consolidation phase and is poised to resume its uptrend.

Likewise, while the PMs have exuded confidence alongside a largely absent USD Index, history implies that another sharp move higher is approaching fast.

 Source: Arbor Data Science

To explain, the orange line above tracks the average performance of the USD Index during global recoveries since 1970, while the blue line above tracks the performance of the USD Index since August 2020. If you analyze the middle of the chart, you can see that the greenback’s bounce off of the bottom nearly mirrors the average analogue. Moreover, while fits and starts were present along the way, the USD Index is approaching a period that culminates with further strength.

And why is this the case?

Well, because, like most things in life, you can’t have your cake and eat it too. With investors pricing in a future of record GDP growth, perpetual asset purchases by the FED, and zero percent interest rates, the goldilocks environment has never occurred in history. For context, when economic growth is strong, increased demand for debt – as businesses increase their capital investments and expand alongside the growing economy – allows lenders to charge higher interest rates. Conversely, when economic growth is weak, decreased demand for debt – as businesses hunker down and preserve capital – forces lenders to offer lower interest rates.

Thus, with a strong economy supposedly around the corner, the U.S. 10-Year Treasury yield and the USD Index should rise in unison (because higher interest rates increase the fundamental value of the U.S. dollar). However, with “elevated risk appetite” (as Brainard puts it) threatening to swallow the financial system, FED officials are wary about reducing liquidity, rising interest rates, and popping the stock market bubble.

Remember though: history has shown that no matter how hard they try, the house of cards always comes crashing down. Case in point: Lords of Finance: The Bankers Who Broke the World dissects the stock market crash of 1929 and The Great Depression.

And if you read the excerpt from the book below, notice a familiar policy?

“The quartet of central bankers did in fact succeed in keeping the world economy going but they were only able to do so by holding U.S. interest rates down and by keeping Germany afloat on borrowed money. It was a system that was bound to come to a crashing end. Indeed, it held the seeds of its own destruction. Eventually, the policy of keeping U.S. interest rates low to shore up the international exchanges precipitated a bubble in the U.S. stock market. By 1927, the Fed was thus torn between two conflicting objectives: to keep propping up Europe or to control speculation on Wall Street. It tried to do both and achieved neither.”

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Disclaimer: All essays, research and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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Carl Schwartz 2 months ago Member's comment

You also mentioned GDX will top at 34 but didn’t it 37.50, HUI. At 300 and crashes, it’s over 301 with a MACD bull cross over. Just saying