Bonds and Gold in Unusual Correlation

Bonds and Gold in Unusual Correlation

Bonds and Gold in Unusual Correlation
December 10, 2016

Gold prices have shown an unusually strong correlation to bond prices this year.  This is not normal, and the two are not usually marching in lockstep like this.

The strong correlation began around May 2016.  It may just be a coincidence that May 2016 was when Saudi Arabia started selling off the holdings of T-Bonds from its sovereign wealth fund, an effort to fund their governmental expenditures in an era of low profits on oil sales.  See http://ticdata.treasury.gov/Publish/mfh.txt.

Whatever the explanation is, the phenomenon is real, down to even a day to day basis.  So if you are a trader or investor who is interested in gold, you had better also be interested in T-Bonds, at least for as long as this correlation lasts.

It is not a normal correlation that we are seeing right now.  Here is a longer term chart, which shows that while there may occasionally be some coincident price turns, the two plots are not generally well-correlated.  Often they move inversely, which makes more sense since gold is supposed to benefit from higher inflation, while bonds get hurt by it.

T-Bond and Gold Prices

So what lies ahead for bonds and gold?  If you believe the big money (smart money) “commercial” traders of T-Bond futures, there should be a big rebound coming.

T-Bond COT Report

Back in July 2016, these smart money traders were holding an all-time record net short position in T-Bond futures.  They correctly anticipated the big price decline which unfolded.  Along the way, they have unwound those shorts, and now they are at a multi-year extreme net long position, betting on a big rebound.

That presumptive rebound should also lift gold prices, assuming that the correlation continues.  And as I discussed back in August, that should also presumably bring a rebound for the Japanese yen.

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An Australian Gold Producer Sells High and Buys Low

By Steve Saville

Blackham Resources (BLK.AX), a junior gold producer that has just begun to ramp-up production at a newly-commissioned mine in Western Australia, reported something interesting earlier this week. Having forward-sold about half of next year’s expected gold production a few months ago when the gold price was near its highs for the year, the company recently took advantage of gold’s price decline by closing-out the bulk of its forward sales. It did so by purchasing gold and delivering it into the forward sales contracts, thus realising a cash profit of A$6.3M.

In other words, having sold high during May-September, BLK’s management turned around and bought low over the past couple of weeks. Sell high, buy low. Sounds like a good strategy to me. More gold producers should try it.

gold_A$_081216

How do You Destroy a Business?

By Bill Bonner

We are looking ahead. And coming together is not only a clearer picture of how Trump’s reflation might turn out… but also a better understanding of what has gone wrong with the whole economy.

Over the next three days, we’ll look at a few of Trump’s money men. Then, we’ll conclude the series with a guess about what will happen when these fellows get to Washington.

Running Out of Time and Money

When we were growing up, we shopped for nearly everything at Sears stores. If it wasn’t in the stores, we ordered it from Sears’ big catalog. The latter was a marvel, where we saw all the things America’s Main Street had on offer at the time. That’s where we did our Christmas shopping.

But looking at a chart of Sears’ stock over the last eight years is like looking at a photo from Aleppo. From nearly $200 a share, it now trades for just over 10 bucks.

What happened?

How could such a great company – owner of Kmart as well as its own Sears’ stores – anchoring malls all over the country with title to some of the choicest commercial space in the nation and owner of the brands we grew up with – including Kenmore appliances and Craftsman tools… How could such a company suddenly put itself into what looks like a death spiral?

Business Insider reports:

According to a recent report by The Wall Street Journal, toy maker Jakks Pacific Inc. recently suspended sales of its products to Kmart, which is owned by Sears Holdings, due to worries about the company’s financial health…

Fitch Ratings in October identified Sears as one of seven major retailers at risk of going bankrupt in the next 12 to 24 months and eventually liquidating.

In September, Moody’s analysts downgraded Sears’ liquidity rating, saying Sears and Kmart don’t have enough money – or access to money – to stay in business.

The Moody’s analysts said Sears is bleeding cash and will have to continue to rely on outside funding or the sale of assets, such as real estate, to sustain operations. Kmart in particular is at risk of shutting down, the analysts said.

The company is running out of time and money. It had $1.8 billion in the till a year ago. Now it has only $238 million. And $3 billion in debt.

How does a company do that? How does it destroy itself… wiping out 130 years of accumulated wealth and knowledge?

The answer is to be found in fake money and the financial insiders who use it to strip out value from Main Street and move it to Wall Street.

Debt and Duplicity

First, as described here many times, fake money weakened the middle class, which shopped at Sears. The rich went to more upmarket retailers such as Neiman Marcus and Nordstrom. The poor went down to dollar stores and Walmart. Sears was left in the middle.

But the more interesting story concerns a Mr. Steven Mnuchin…

Mr. Mnuchin was on the board of Sears for the past 11 years, throughout its devastating decline. He is resigning now, letting the ship go down without him. Besides, he has already stolen the silver.

How do you destroy a business?

It’s not that hard. Rather than invest in new people and new methods, you take the money for yourself.

It is even more attractive if you can borrow a lot of fake money at ultra-low rates against the company’s credit… pay it out to yourself and other financiers… and then jump ship, leaving the company, its employees, and its creditors to drown in your debt.

That is what Mnuchin did. Here’s David Stockman:

…during the last 11 years [Sears] spent $7 billion on stock buybacks or nearly double the amounts it reinvested in maintaining and renewing its store base, which at one time numbered more than 4,000 Sears, Kmart, and other specialty store units.

In terms of sales, Sears spent less than a third as much as rival Walmart on capital improvements. Instead, insiders pumped the money into their own pockets, mainly with buybacks.

Classmates and Cronies

Then, either seeing the handwriting on the wall… or putting it there themselves… they pulled a fast one, evidently with Mr. Mnuchin’s cooperation.

Two hedge funds swooped in with a plan: They would use cheap financing to transform valuable Main Street real estate into a Wall Street asset. They set up a real estate investment trust (REIT), took the property out of the company, and put it in the REIT.

[Note: A REIT is similar to a mutual fund, except that it is composed of property instead of stock.]

Sears can go broke; they will still have the company’s most valuable assets. And now they can sell the REIT to investors.

And by the way, one of the two funds involved is run by a former college classmate and Goldman Sachs crony of Mnuchin’s, Eddie Lampert.

Stockman continues:

…the whole deal was a backdoor financing to get assets out of SHLD [Sears] prior to its impending bankruptcy. The hedge fund insiders will now have a secured senior claim through the newly created REIT, which they substantially own, rather than worthless SHLD common stock.

At least Steve Mnuchin can do Sears no more harm. Donald Trump picked him as his Treasury secretary.

3 Killer Charts, 2 Fast Looks at Politics

By Elliott Wave International

3 Killer Charts, 2 Fast Looks at Politics

Global Market Perspective is Your Roadmap to Global Investment Opportunity

Covering more than 40 markets on 50-plus pages each month, Global Market Perspective prepares subscribers for opportunities around the world. Get the latest forecasts for U.S., Asian-Pacific and European stocks and economies, global currencies, bonds, crude oil and more. Learn More about Global Market Perspective

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If you’re not ready to subscribe, this free report is a great place to start learning about the Wave Principle.

Unleash the power of the Wave Principle

Much like a great sports play; to appreciate a great market forecast, you have to see it. In fact, we’d like to show you four. Our examples do indeed show what can happen when Elliott analysis meets opportunity. But we’re not asking you to attend a class in ‘good calls.’ In each of these four markets, the unfolding trends have (once again) reached critical junctures. You really, really want to see what we see, right now. Get your report — How to Find Real Opportunities in the Markets You Trade — FREE


This article was syndicated by Elliott Wave International and was originally published under the headline 3 Killer Charts, 2 Fast Looks at Politics. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Now it’s a Boom

By Jeffrey Snider of Alhambra

The current economy is nothing like recovery; nothing

There is a distinction between actual, meaningful growth and plain positive numbers. Recession everyone can agree on, as nearly every economic account (but not all) finds itself with a negative sign. Because of the binary model that the mainstream associates with all economic conditions, the absence of contraction is conflated with meaningful growth, even where the statistics are nothing like it.

Because of this, positive numbers are the worst case scenario. Recession is a cyclical process which has a predetermined end – inevitable recovery. Though it might be bad to very bad for a time, we know that when the negatives turn positive the economy will resume its prior place after a relatively short adjustment.

The current economy is nothing like recovery; nothing. But it is and has been full of positive numbers which actually hinder the recovery process. They do so because they cloud the issue as to whether there is anything wrong, let alone anything so serious as to indicate an economy beyond the business cycle. Economists can plausibly claim that there is growth, even though the fruits of actual growth remain viscerally absent from day-to-day life.

The ambiguity of positive numbers is their biggest danger. They bolster the mistaken to keep making the same mistakes because whatever had been done didn’t lead to unambiguous contraction. That was the difference about this “rising dollar” version as opposed to the phase immediately after the 2012 slowdown. Starting in late 2014, negative signs began to appear and not just in the US. Tied mostly to manufacturing and trade, steady contraction turned the tide of opinion and even expectation toward realizing the difference between positive numbers and actual recovery.

abook-dec-2016-lmci-ratchet abook-dec-2016-lmci-ratchet-durable-goods abook-dec-2016-lmci-ratchet-china-ip

It was only positive numbers upon which policymakers and economists (redundant) predicated their assertions about “full employment” and what that was supposed to mean for the full economy entering 2015. Because those positive numbers in 2014 became slightly more positive as compared to 2013 and 2012, that fog over interpretation fell in Janet Yellen’s favor. By the middle of 2015, however, such benefit of the doubt was removed when “global turmoil” revealed the distinctions so as to lay bare how the positive numbers of 2014 were not, in fact, indicative of meaningful growth.

Continue reading Now it’s a Boom

Crude Oil Prices: “Random”? Hardly

By Elliott Wave International

Crude Oil Prices: “Random”? Hardly.
The more emotional the market, the more predictable it is.

Last week’s shocking spike in crude oil prices is +12% and counting, the biggest one-week gain in five years. Media stories blame one culprit: the November 30 OPEC agreement to cut production.

In absolute terms, the agreed-to cut is small: 1.2 million barrels a day, less than 2% of daily global oil production. Given the existing supply glut, that’s a drop in the bucket (no pun intended). Yet, it was a bigger cut than the market expected; plus, the fact that OPEC members came to an agreement at all was enough to play a role in soaring prices.

The weeks leading up to the meeting were filled with anticipation and emotion. Oil prices went all over the place — down 4% one day, 3% the next. Yet, those fluctuations weren’t random.

The more emotional the markets get, the more influential the collective psychology of the market players becomes. That’s why Elliott wave price patterns often get particularly clear when volatility strikes.

See for yourself. Below are excerpts from the forecasts our Energy Pro Service, edited by the veteran oil market analyst Steve Craig, posted for subscribers starting in mid-November.

November 15

— Today’s pop above 45.95 leads me to believe that wave A ended at Monday’s 42.20 sell-off low. Trade below 45.28 would offer an aggressive hint that wave ((a)) is complete and I’ll be looking for downside follow through…

November 18

— Crude extended its slide from Thursday’s 46.58 rebound high down to 44.55 and is attempting to reverse. …trade above 46.58 should be a good sign that it marks an interim bottom and that the next leg of the advance is underway.

Continue reading Crude Oil Prices: “Random”? Hardly

The Problem is a Single Central Bank, Not a Single Currency

By Steve Saville

Economically and politically disparate countries throughout the world successfully used a common currency for centuries

The euro-zone appears to be on target for another banking crisis during 2017. Also, the stage is set for political upheaval in some European countries, a general worsening of economic conditions throughout Europe and widening of the already-large gaps between the performances of the relatively-strong and relatively-weak European economies. It’s a virtual certainty that as was the case in reaction to earlier crises/recessions, blame for the bad situation will wrongly be heaped on Europe’s experiment with a common currency.

The idea that economically and/or politically disparate countries can’t use a common currency without sowing the seeds for major problems is just plain silly. It is loosely based on the fallacy that economic problems can be solved by currency depreciation. According to this line of thinking, countries such as Italy and Greece could recover if only they were using a currency that they could devalue at will. (Note: The destructiveness of the currency devaluation ‘solution’ was covered in a previous blog post.)

The fact is that economically and politically disparate countries throughout the world successfully used a common currency for centuries up to quite recently (in the grand scheme of things). The currency was called gold.

The problem isn’t the euro; it’s the European Central Bank (ECB). To put it another way, the problem isn’t that a bunch of different countries are using a common currency; it’s that a central planning agency is attempting to impose the same monetary policy across a bunch of different countries.

A central planning agency imposing monetary policy within a single country is bad enough, in that it generates false price signals, foments investment bubbles that inevitably end painfully, and reduces the rate of long-term economic progress. The Federal Reserve, for example, has wreaked havoc in the US over the past 15 years, first setting the scene for the collapse of 2007-2009 and then both getting in the way of a genuine recovery and setting the scene for the next collapse. However, when monetary policy (the combination of interest-rate and money-supply manipulations) is implemented across several economically-diverse countries, the resulting imbalances grow and become troublesome more quickly. That’s why Europe is destined to suffer a monetary collapse well ahead of the US.

It should be kept in mind that money is supposed to be neutral — a medium of exchange and a yardstick, not a tool for economic manipulation. It is inherently no more problematic for totally disparate countries to use a common currency than it is for totally disparate countries to use common measures of length or weight. On the contrary, a common currency makes international trading and investing more efficient. In particular, eliminating foreign-exchange commissions, hedging costs and the losses that are incurred due to unpredictable exchange-rate fluctuations would free-up resources that could be put to more productive uses.

In conclusion, the problem is the central planning of money and interest rates, not the fact that different countries use the same money. It’s a problem that exists everywhere; it’s just that it is more obvious in the euro-zone.

Reliable Contrarian Indicator Says Stocks Could Rise 25%

By Chris Ciovacco

Positive Returns 97% Of The Time

Based on current readings of their “sell side indicator”, Bank of America/Merrill Lynch (BOAML) recently wrote in a research note to clients:

“Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 97% of the time, with median 12-month returns of +25%,”

Recommended Stock Allocations Remain Low

The BOAML indicator is based on the recommended stock allocations inside portfolios. A typical benchmark equity allocation is 60%-65% of a portfolio. Presently, the recommended allocation is significantly below that range, coming in at 51%. If the recommendations moved back to the historical mean, as they typically do, money would continue to flow out of bonds and into stocks. More information about the BOAML signal can be found on Yahoo Finance.

A Separate Rare Signal Also Leans Bullish

Has any other longer-term signal appeared recently that aligns with the possibility of double-digit stock gains over the next 12 months? Yes, this week’s stock market video covers a monthly S&P 500 momentum and trend signal that has occurred less than 10 times over the past 23 years. The signal was triggered at the end of November. Even more importantly, the signal was also triggered recently in numerous risk-on ETFs, such as small-caps (IWM), mid-caps (MDY), energy (XLE), copper (JJC), materials (XLB), and the total stock market (VTI), which may be due in part to allocation shifts based on President-elect Trump’s platform. Bearish signals have been triggered in defensive assets such as bonds (TLT), utilities (XLU), consumer staples (XLP), and healthcare (XLV), which may be due in part to post-election shifts regarding growth, earnings, taxes, deficits, and inflation.

Continue reading Reliable Contrarian Indicator Says Stocks Could Rise 25%

Dang it, Gold’s Supposed to Go Up!

By Keith Weiner of Monetary Metals

Our view is that the drivers which have caused the interest rate to fall for 35 years are still in full, deadly effect

We’ve gone through a succession of events and processes that were supposed to make gold go up. The following list is by no means exhaustive:

  1. Quantitative Easing
  2. Bernanke’s Helicopter Drops
  3. Janet Yellen’s Keynesianism
  4. Obama’s Deficits (US government debt is now a hair away from $20,000,000,000—and that’s just the little part of it they put on their balance sheet)
  5. The election of Trump
  6. The Italian Referendum (current as we write this)

Each has been good for a little blip that has been forgotten in the noise. We are seeing articles now that have moved on to the next old-new story. It seems that Trump is going to spend a lot on infrastructure. This will require massive deficits. But the market will distrust that the government can pay. So we will see a twin sell off of the US dollar in terms of other currencies, and Treasury bonds in terms of dollars. This will cause the mases to Discover Gold and the gold price is going to skyrocket. Click here to buy our fine gold, we have the very best gold.

We get it. Everyone thinks that interest rates are going up because inflation because more spending. Actually not quite everyone—our view is that the drivers which have caused the interest rate to fall for 35 years are still in full, deadly effect. Nor the folks who are bidding on junk bonds, or stocks for that matter.

But most everyone. Rates have to go up, because they’re lower than ever before history. Right?

And if rates are going up, then so is gold, right?

The Treasury bond is payable only in US dollars. The US dollar, which is the liability of the Federal Reserve, is backed on by Treasurys. It’s a nice little check-kiting scheme. But besides that, the two instruments have the same risks. If you don’t like the bond, then you won’t like the dollar either. The day will come when en masse, the market decides it doesn’t like both of them, and gold will be the only acceptable money.

With due respect to our old friend Aragorn, today is not that day!

We believe interest rates are headed lower, not higher. But that said, we do not see any particular causal relationship between the interest rate and the price of gold. The former is the spread between the Fed’s undefined asset and its undefined liability. It is unhinged and while it could shoot the moon from Truman through Carter, it’s sailing in the other direction now. Down to Hell.

The price of gold is the exchange rate between the Fed’s liability and metal. So long as people strive to get more dollars—most especially including those who bet on the price of gold, and those who write letters encouraging the bettors—there is no reason for this exchange rate to explode.

To again plagiarize the Ranger from the North, the day will come when gold goes into permanent backwardation. But today is not that day!

Today (Friday’s close), the price of gold is down seven Federal Reserve Notes from where it was a week ago.

So where to from here? Are those dratted fundamentals moving?

We will update those fundamentals below. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
gold and silver

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It fell a bit more this week.

Continue reading Dang it, Gold’s Supposed to Go Up!

Trump, Bonds, Peripheries, China and Italy

By Doug Noland

Credit Bubble Bulletin: Trump, Bonds, Peripheries, China and Italy

The trading week saw WTI crude surge 12.2%. The GSCI commodities index jumped 5.8%. Wheat dropped 3.6% and corn fell 3.1%. Italian 10-year yields fell 18 bps, and Greek yields dropped 37 bps. Meanwhile, Portuguese yields jumped 13 bps. In U.S. equities, Bank stocks (BKX) jumped 1.5%, while the Morgan Stanley High Tech index dropped 3.4%. The Biotechs (BTK) sank 6.4%. The DJIA was little changed, while the small caps fell 2.4%. Just another week for unstable global markets.

Pre-election trepidation morphed into post-election market exuberance, in only the latest demonstration of the power of an over-liquefied market backdrop. Here in the U.S., the bullish imagination has been captivated by the Trump administration’s pro-growth agenda, with its focus on tax and health-care reform, deregulation and infrastructure spending. The DJIA this week added slightly to record highs.

Meanwhile, a decidedly less halcyon reality seems to be coming into somewhat clearer focus: Trump’s victory likely marks a major inflection point for global markets. Bond yields have shot higher, while inflation expectations are being reset. The U.S. dollar has surged, while the emerging markets have come under pressure. From U.S. equity and bond ETFs to international financial flows, “money” is sloshing about chaotically.

There’s an extraordinary amount of confusion throughout the markets. For over a year I’ve posited that the global Bubble has been pierced. This view was in response to faltering EM, mounting Chinese instability, the collapse in crude and energy-related debt problems (from U.S. junk to global corporates and sovereigns). Especially in response to early-2016 global market instability, the Fed froze its baby-step “tightening” cycle, while the Bank of Japan and European Central Bank (and others) ratcheted up what were already desperate QE measures. In China, officials threw up their hands and set the Credit floodgates wide open.

It’s worth noting that the S&P500 rallied 22% from February 2016 lows. U.S. bank stocks (BKX) have surged a stunning 60%. From January lows to November highs, Brazilian stocks jumped 75%. Emerging Market equities (EEM) rallied almost 40%. Chinese stocks recovered 25%. Basically, EM stocks, bonds and currencies rallied sharply from Asia to Eastern Europe to Latin America.

Waning badly early in the year, confidence in central banking was rejuvenated by an audacious display of concerted “whatever it takes.” I believe history will view ECB and BOJ QE moves as dangerously misguided, while the Fed (again) failed to heed the lessons of leaving policy way too loose for too long. Forces that central bankers set in motion early in the year may have largely run their course.

Continue reading Trump, Bonds, Peripheries, China and Italy