Case Study: Can Gold Rally Along With Inflation?

So I woke up a few days ago and saw this WSJ piece.

Yes, world; letting real rates stay negative for so long was probably going to do that.

I thought it would be a good excuse to compose another thought piece. Like the kids say: here goes nothing.

Now we've detailed potential drivers for inflation in the past - with oil ripping towards new highs (Saudi-corruption-purge-driven or not), nominal rates ripping higher, and stocks falling, I was curious to also see gold also down.

I am a strong believer that gold trades like a currency rather than a commodity. Commodities for the most part trade based on supply and demand. The demand function is usually the result of end-use products that during special situations may be propelled further by speculative fervor.

Oil gets turned into gasoline and put into vehicles, grains, softs, meats get eaten, metals get thrown together to make cool stuff, etc. etc.

The supply function, in many aspects, behaves in accordance with price. Price goes higher, people invest in getting more of that high price "stuff" whatever it may be and vice versa.

Gold is a bit different. Why? Like all commodities, it can store some value. But the key difference here is the fact that global central banks, those crazy economic professor types, deem it as a viable form of storer of value and medium of exchange so much that they accumulate it as reserves.

As a result, gold more than any other precious metal trades like a currency based on the rates of the country that it's denominated in.

So here we are at the focal investigation of the post. Hypothetically, if inflation rises (let's not argue this right now and just assume such is the case), will gold be a good hedge? 

Let's go to the charts first, since I'm lazy.

Yes, yes I know - I didn't get the chance to run the regression on returns vs returns - I have a very finite window to use BBG and the files I build I cannot keep. On top of that, without a BBG API, it takes a horrific amount of time to manually extrapolate the real yield (before the existence of TIPS) by interpolating the CPI.

With my whining aside, even with an "incorrect" price vs price regression - you can observe the directional relationship between gold and those rates. Also, the relative relationship between the different rate products vs gold should be valid as well (the base effect from the regression of price vs price as a result of the level differences should be somewhat negated as all the rate products are roughly on the same base level).

Spot gold px vs real yield shows the tightest connection here. So we'll focus in on that one for a sec.

From the above, it is evident that gold goes down when real yields go up in a semi-lockstep fashion. (I assume the economic driver here is: holding gold which yields nothing vs holding a currency which in some situations can yield a lot in real terms and in other situations can yield very little or even negative in real terms)

Conclusion 1 - Gold trades rather closely with real yields. Although there are sure to be other factors influencing the gold price, it is roughly over the long term a function of real yields.

Moving along. Assuming the answered found in Conclusion 1. Can gold always be a good hedge for inflation? Or better yet, can real vs nominal yields diverge (widening of breakevens and thus the emergence of "inflation") without real yields actually going up significantly (real yields going up would theoretically put significant downward pressure on gold)

Let's look at some different yield regimes. 

The two main interests that occupy my focus for this experiment. They are the high inflation periods of the 70's and 80's as well as the periods of shock post the dot-com bubble and the GFC.

Now I'm going to add some events to shed some qualitative light on the various worldly happens which caused individual reactions to rates. 

FYI, for those with a short attention span - this will be a very long table. I will highlight in red those times when real rates were likely zero or negative (higher inflation vs fed funds rate) and I will also provide a summary at the bottom.


The inflation prints were averaged out for entire years while the Fed Funds rate is printed on the table only when a change occurs. Basically, this analysis is far from perfect. 

However, assuming that those highlighted periods were times when real rates were either negative or close to zero is probably semi-safe. Besides, what's life without the right amount of danger, eh?

Those with the curiosity of a cat and armed with a Bloomberg terminal can hopefully use this as a launch pad for additional analysis.

DateFed Funds Rate Event
Fed Chair Arthur Burns (January 1970 - March 1978)
1971: GDP = 3.3%, Unemployment = 6.0%, Inflation = 3.3% 
Jan4.5% - 4.0%Expansion.
Jul5.5%Fed raised rate to fight inflation.
Aug5.75%Wage-price controls.
Nov5.0%Lowered rate to stimulate growth. 
1972: GDP = 5.2%, Unemployment = 5.2%, Inflation = 3.4% 
Mar5.5%Raised rate to combat inflation. Confused markets.
1973: GDP = 5.6%, Unemployment = 4.9%, Inflation = 8.7% 
Jan6.0%Raised four times that month.
Feb6.75%Lowered to 6.5%, then raised to 6.75%.
Apr7.25%Raised for next five months.
Aug11.0%OPEC embargo created inflation in October.
1974: GDP = -0.5%, Unemployment = 7.2%, Inflation = 12.3% 
Jul13%Raised from March to mid-July.
Dec8.0%Lowered gradually from July to December.
1975: GDP = -0.2%, Unemployment = 8.2%, Inflation = 6.9%
Jan6.5%Lowered four times in January.
May5.0%Lowered five times in five months.
Sep6.5%Raised from June through September.
1976: GDP = 5.4%, Unemployment = 7.8%%, Inflation = 4.9%
Jan4.75%Lowered from October through January.
Apr5.5%Raised in April and May.
Nov4.75%Lowered from July - November.
1977: GDP = 4.6%, Unemployment = 6.4%, Inflation = 6.7%
Aug6.0%Raised from December through August
Oct6.5%Raised again in September and October.
Fed Chair William Miller (March 1978 - August 1979)
1978: GDP = 5.6%, Unemployment = 6.0%, Inflation = 9.0%
Dec10.0%Raised each month from April through December.
Fed Chair Paul Volcker (August 1979 - August, 1987)
1979: GDP = 3.2%, Unemployment = 6.0%, Inflation = 13.3% 
Oct15.5%Raised rates 4 points.
Dec12.0%Gradual decline through the month.
1980: GDP = -0.2%, Unemployment = 7.2%, Inflation = 12.5%
Jan14.0%Increased rapidly that month.
Mar20.0%Raised rates in February and March.
Jun8.5%Lowered to 9.5% in May and 8.5% in June. 
Sep12.0%Rates increased to 10.0% in August and 12.0% in September
Dec20.0%Raised steadily until mid-December.
Dec 2918.0%Lowered two points.
1981: GDP = 2.6%, Unemployment = 8.5%, Inflation = 8.9%
Jan20.0%Reagan took office. Volcker raised rates again.
Apr16.0%Lowered 4 points.
May20.0%Raised 4 points.
Dec12%Lowered 8 points.
1982: GDP = -1.9%, Unemployment = 10.8%, Inflation = 3.8%
Apr15.0%Raised 3 points.
Dec8.5%Lowered nine times over nine months.
1983: GDP = 4.6%, Unemployment = 8.3%, Inflation = 3.8%
Aug9.66%Raised from May to August.
Oct9.25%Lowered from August to October
1984: GDP = 7.3%, Unemployment = 7.3%, Inflation = 3.9%
Aug11.75%Raised from March to August.
Dec8.25%Lowered from September to December.
1985: GDP = 4.2%, Unemployment = 7.0%, Inflation = 3.8%
Mar9.0%Raised from February to mid-March.
Dec7.75%Lowered from April to December.
1986: GDP = 3.5%, Unemployment = 6.6%, Inflation = 1.1%
Aug5.66%Lowered from March to August.
Fed Chair Alan Greenspan (August 1987 - January 2006)
1987: GDP = 3.5%, Unemployment = 5.7%, Inflation = 4.4%  
Sep7.25%Raised rates from April to September.
Nov6.75%Lowered after October 19 stock market crash.
1988: GDP = 4.2%, Unemployment = 5.3%, Inflation = 4.4%
Feb6.5%Lowered in January and February.
Dec9.75%Raised rates to fight inflation.
1989: GDP = 3.7%, Unemployment = 5.4%, Inflation = 4.6%
Dec8.25%S&L crisis. Fed lowered rates.
1990: GDP = 1.9%, Unemployment = 6.3%, Inflation = 6.1%
Dec7.0%Recession began in July.
1991: GDP = -0.1%, Unemployment = 7.3%, Inflation = 3.1%
Dec4.0%Recession ended in March.
1992: GDP = 3.6%, Unemployment = 7.4%, Inflation = 2.9%
Apr 93.75%Expansion.
Jul 23.25%
Sep 43.0%Clinton took office in 1993. Fed made no changes.
1994: GDP = 4.0%, Unemployment = 5.5%, Inflation = 2.7%
Feb 43.25%
Mar 223.5%
Apr 183.75%
May 174.25%
Aug 164.75%
Nov 155.5%Raised rates.
1995: GDP = 2.7%, Unemployment = 5.6%, Inflation = 2.5%
Feb 16.0%Raised rates.
Jul 65.75%Lowered rates.
1996: GDP = 3.8%, Unemployment = 5.4%, Inflation = 3.3% 
Jan 315.25%Kept rates low despite inflation.
1997: GDP = 4.5%, Unemployment = 4.7%, Inflation = 1.7% 
Mar 255.5%
1998: GDP = 4.5%, Unemployment = 6%, Inflation = 1.6%
Sep 295.25%LTCM crisis.
Oct 155.0%
1999: GDP = 4.7%, Unemployment = 6%, Inflation = 2.7%
Jun 305.0%Raised rates
Aug 245.25%
Nov 165.5%
2000: GDP = 4.1%, Unemployment = 6%, Inflation = 3.4%
Feb 25.75%Raised rates despite stock market decline in March.
Mar 216.0%
2001: GDP = 1.0%, Unemployment = 6%, Inflation = 1.6% 
Jan 36.0%Bush took office. 
Jan 315.5%
Mar 205.0%Recession began. Fed lowered rates to fight it.
Apr 184.5%
May 154.0%
Jun 273.75%EGTTRA tax rebate enacted.
Aug 213.5%
Sep 173.0%9/11 attacks.
Oct 22.5%Afghanistan War.
Nov 62.0%
Dec 111.75%
2002: GDP = 1.8%, Unemployment = 6%, Inflation = 2.4%
Nov 61.25%
2003: GDP = 2.8%, Unemployment = 6%, Inflation = 1.9%
Jun 251.00%JGTRRA tax cuts enacted.
2004: GDP = 3.8%, Unemployment = 6%, Inflation = 3.3%
Jun 301.25%Low rates pushed interest-only loans. Helped cause Subprime Mortgage Crisis.
Aug 101.5%
Sep 211.75%
Nov 102.0%
Dec 142.25%
2005: GDP = 3.3%, Unemployment = 6%, Inflation = 3.4%
Feb 22.5%Borrowers could not afford mortgages when rates reset in 3rd year. 
Mar 222.75%
May 33.0%
Jun 303.25%
Aug 93.5%
Sep 203.75%
Nov 14.0%
Dec 134.25%
Fed Chair Ben Bernanke (February 2006 - January 2014)
2006: GDP = 2.7%, Unemployment = 6%, Inflation = 2.5% 
Jan 314.5%Raised to cool housing market bubble. More homeowners default.
Mar 284.75%
May 105.0%
Jun 295.25%
2007: GDP = 1.8%, Unemployment = 6%, Inflation = 4.1%
Sep 184.75%Home sales fell.
Oct 314.5%
Dec 114.25%LIBOR rose.
2008: GDP = -0.3%, Unemployment = 6%, Inflation = 0.1%
Jan 223.5%
Jan 30 3.0%Tax rebate.
Mar 182.25%Bear Stearns bailout.
Apr 302.0%Lehman fails. Bank bailoutapproved. AIG bailout.
Oct 81.5%
Oct 291.0%
Dec 160.25%Effectively zero. The lowest fed funds rate possible.
Fed Chair Janet Yellen (February 2014 - January 2018)
2015: GDP = 2.6%, Unemployment = 6%, Inflation = 0.7% 
Dec 170.5%Growth stabilized.
2016: GDP = 3.2%, Unemployment = 4.6%, Inflation = 0.4% (as of December, 19 2016)
Dec 140.75%
2017: GDP, Unemployment and Inflation TBD
Mar 151.0%Fed projects steady growth.
Jun 141.25%

Whoa, that was a lot of blog space. If you want a descriptive version of what happened - here's an NY Times article.

So to summarize some of the events in the table, we have a few periods of interest. You have 1973 - 1979 where there were often times when real rates were either negative or close to being negative. Same can be said about 2004 - 2005 and then 2008 where real rates were negative at the end of the year. - 2016.

I believe monetary stimulus is much more effective (perhaps, only effective) when there is fiscal stimulus implemented in a concurrent fashion.

Here is a chart of long-term government spending.

If you carefully look, I saw spikes in government spending relative to government receipts in 1975-1977, what looks to be around 1987, 1992, 2001, and then 2009. Therefore, I expect those times, if combined with low/negative rates to create a sizable amount of inflation.

The opposite trend could be said from the mid-1990's to 2000. I would expect low inflation during this period especially if real rates were positive.

Now tying it all together with the gold price. I have three screenshots. 

Rates: Nominal vs Real in different "regimes"

Spot gold prices in corresponding "regimes"

My weekly data for gold doesn't go back that far - so here is the chart for the first "regime (1975 to 1985) in monthly spot gold prices.

1975 - 1985

As you can see from the above: our data starts with gold falling close to ~50% (from 180 to below 100) from 1975 to late 1976 as real yields rose against steady nominals (a closing of the breakeven inflation). 

Then, we experienced something extraordinarily scary - a rise in nominal yields with a falling real yield from 1978 to 1980. This development of inflation along with real yields actually trading lower led to an explosion in gold prices (trough to peak move of ~400% in one year) - proving that gold was indeed a good inflation hedge in this scenario. Finally, real yields marched higher along with nominals and gold went into a huge bear market.

So yes, there can be a bond bear market (nominal rates rising) while there is a breakout in inflation - during which gold would be a great hedge. However, interestingly, even with low rates and inflation during the early and mid-1970's, gold actually fell ~50%. Remember, 1975 we had the increase in government spending as noted above. In addition, we had close to negative real rates.

It seems that the direction of the real yield and the general direction of inflation actually caused gold prices to fall despite the absolute level of inflation was still high. 

Bretton Woods and the oil shock were monumental events that contributed to all asset classes in this period. I'm not an expert on either of those subjects, so I will leave any potential contributions & impact of those events to this price action to you guys.

1985 - 1996 

Moving on to the next time bucket. 1985-1996 saw a rally in gold from 1985 to 1988 coming out of the bear market. 1986 - 1987 saw a small pocket of breakeven inflation going higher, potentially triggering gold higher as well. 

Interestingly as nominal rates continue to fall in the beginning of the 1990's - real rates roughly stay the same. Gold did not trade closely with real rates in this scenario and instead tracked breakeven inflation as both kept getting squeezed lower. 

Lastly, you had meaningful moves in nominals and real yield first higher, then lower in 1994 to 1996. Gold ultimately did not care as it stayed tightly range bound.

1996 - 2009

A quick side note: of the 4 rates charts in the real vs nominal screenshot above, this regime's chart actually has the red line as the real yield and blue as the nominal - sorry for any confusion.

Continuing with the decrease in government spending and generally low inflation of the mid-1990's - gold continues to slide, goes nowhere.

Then, when we hit the 2000's, we started to see both nominals and real yield go lower. This move was roughly in tandem so I don't think breakevens were moving much. With a slight expansion of breakevens and inflation itself not really trading directionally despite lower rates and increased government spending, gold's reaction was to steadily build into a bull market.

In my opinion, this move in gold in the 2000's could be explained by persistently lower real yield. Inflation had risen slightly but it was nothing significant and definitely dwarfed by the move in gold.

Lastly, we have 2008 - 2009. Real yields spiked higher while inflation collapsed - gold subsequently sold off, tracking both inflation and real yields pretty well.

2009 - Present

Post GFC, the most interesting period of time was late 2011 to 2013. Nominals started to bottom out while real yield continued to march lower. We began building higher lows in breakevens as inflation looked poised to go higher. 

This actually proved to be the peak in gold. As real yields spiked higher in what was later deemed the taper tantrum with gold going into bear market ever since.

Conclusion 2: After all that rambling, here's to summarize: I think gold is probably less of an inflation hedge than some might think. Although it does follow inflation to an extent - gold also seems to be very sensitive to real yield moves. If you believe real yields are set to rise along with inflation - then gold might not necessarily do very well - for example, 1981-1982, gold kind of topped out despite the fact that there was still pretty high inflation simply because real yields were rising.

But then, you have scenarios such as the early/mid-2000's with low and steady inflation, with a consistently lower real yield, where we also witnessed the foundation of a huge gold bull market.

And ultimately, there are scenarios of higher nominal yield and lower real yield - usually, they are ephemeral, lasting only a few months. However, we saw a meaningful one that lasted from 1978 to 1980. 

Keep in mind as with many things in the market, it seems that direction mattered more often than level. For example, when the widening of real and nominal rates in 1980 hit its zenith, gold was already peaking. 

Other miscellaneous charts for your musings:

Here's FED and ECB assets vs spot gold price

Here's gold vs the VIX

I think our own Macro Man did a little bit of analysis on that one as well. I'm sure all the readers have seen that one, but in case you haven't, here it is - linked here.

And that's all I got this go-round, guys.

Hope everyone has a wonderful day and weekend. Stay warm out there!

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Click here for comments
November 11, 2017 at 9:12 PM ×

I am convinced inflation is unknowable. Someone give me the definition. The mechanism that sets it in motion. The environment that fosters inflation. What is price? What is value? Let’s define the natural or real rate. I can make a very good case that all market rates are is the individuals inter-temporal time preference.

My point is I’d love to sit back and ask the question-why inflation, as we know it, even exists. Now I am obviously aware of scarcity and the nuts and bolts of S/D and the concept of finite resources causing possible price hikes in that individual commodity. However why do all prices suddenly increase together? Is that the herding mechanisms that just cause a panic in humans? What is inflation and how can we separate it from real economic growth. I have a unique take on it and why the CB’s love it besides it’s benefits to accrued debt. Which even that Econ 101 maxim is unproven. It’s to long of an explanation for this thread but...yeah I’ve got thoughts.

Answering the question above I’d say NO gold isn’t a guaranteed hedge at all anymore. In fact it’s been positively correlated to the dollar the past least more positive l correlation between the dollar and gold than we’ve seen in the past. I think yields and inflation goes up together along with the dollar. 78-80 was a great period to highlight falling real yields and rising nominal yields. FOR ME this is more of a volatility breakout. Like a serious haywire event in the market. This move is where Gold fucking shines. You might say it’s still a safe have currency or for sure end of the world insurance...

November 12, 2017 at 9:09 AM ×

Hey , Leftback. No shit, I haven't read of this report. It's a Saturday report! No shit.....ya think you and I have started something in Hollywood. You know it doesn't matter.....each way it goes,..... I'm taking home those Eastern European breed fillies, or nothing at all.

November 12, 2017 at 3:50 PM ×

@Leftback, I'm going into analysis mode from here. Going into a journey within the markets for 3 months on my uni break until I start last semester. But, I'll leave you with this between breaks. At least Goldfinger used to throw his shit around on the polo field and back it up.

November 13, 2017 at 3:27 AM ×

Great post, Detroit Red! I just want to put my 2 cents in. Technically speaking, gold price is in a 125-pt wide uptrend channel and is about to kiss the bottom of the channel at 1260-ish. If my near-term dollar bearishness is confirmed, we are about to see an uplift back to 1385-ish. Should this channel break down significantly I will lay down the arms and go home. No need to fight.

November 13, 2017 at 9:34 AM ×

Gold is still overvalued relative to usd/jpy. Until this is equalised we cannot see the next leg. For pocket money, a short on both on a intra-day basis is still paying out.

November 13, 2017 at 2:35 PM ×

State Street’s $11.8 billion junk-bond ETF had one of the biggest withdrawals in its history on Friday.

November 13, 2017 at 9:02 PM ×

Nice post, DR. Thank you! This site needed that post.

Don't think I left any comments last week. Wild one in merger arbitrage land where you had AT&T insinuating through press leaks that the antitrust head at the DoJ is Trump's stooge. Very unusual.

Anyhow ... tightened up the macro book, exiting aluminum (waning mo), CAC v SPX ex-FANG (also, waning mo), pairing EURNOK (but put back on later today). Made decent money scalping USDCAD from the short side, ditto NZDUSD from long side, though latter doesn't feel ready for much of a bounce. EURRON is interesting and I initiated a new long there. Central bank allowing more FX flexibility, and fiscal situation and real rates going the wrong way. Not expecting to get rich, after bid/ask and the forward points, but seems OK. Have bought some OTM upside in sterling, thinking that the exit bill impasse gets resolved, markets presume a transitional deal, and a hiking cycle can unfold. Still quite uncertain when the bill is settled. Would seem to be December (David Davis confirmed that thinking just recently, but some on European side talking March). If anyone has a view on the timing, speak up. Have to think Tories won't do anything to precipitate an early election, so not so worried about these challenges to May within the party (there was some comment by a Minister in The Times, but giving it short shrift). Still, only involved in options. My biggest exposure - also all through options - remains long EURCHF. Hedged out my delta on RKO oil calls expiring shortly.

China data has been coming in weaker lately. Take note. The $64B question: will China abandon annual GDP targets? Xi didn't mention a GDP target in his whole 3 hour speech. Hard for me to be too bullish (China-dependent) EM going into 2018.

My bucket of cold water today is for yield curve doom and gloom. JPM: equities never peaked before the yield curve became outright inverted. In the time it takes 2s10s to go from 72 to 0 AMZN can hit Morgan Stanley's new $2,000 target! Have to do better, bears.

Wild card is a Saudi-Iranian war. MBS really wants to open another front in Lebanon when he can't make headway in Yemen? Would be nuts, right?

November 13, 2017 at 11:32 PM ×

Saudi not get much support to do anything in Lebanon. No-starter.

November 14, 2017 at 5:46 AM ×

Lebanon is not having it that’s for sure. I know of a lebonese journalist over there and she made it clear that they are not only not willing to support the SA regime, but outwardly hostile to it. She’s a little biased, but the information I gleaned on my own generally supports her view

November 14, 2017 at 2:14 PM ×

The flattener is back. 2s10s at 70 again. We are close to 100% on a Dec rate hike priced into FFR, so upward pressure on the entire curve is likely to abate a little here. We added a little to our long bond position yesterday. Dollar is weaker. Keep an eye on the yen, also some signs of Japanese inflation getting off the floor, remarkable if true, and with consequences for equities obviously, since the Nikkei for sure is nothing but a massive leveraged yen carry trade…

Bonds sold off - for about a minute - after the hotter than expected PPI today. Wages and consumer spending are the data points that the long end is paying attention to, and inflation expectations by those measures remain soft. We would expect to see the short end stay more or less pinned into FOMC and long end rates drift lower as the flattener grinds on.

Looking ahead we have Nov options expiration this Friday and then the short week into Thanksgiving. It would not be surprising to see Vol Sellers ride in once more to rescue US equities and junk bonds, but the resulting relief rally might be the last hurrah for a while.

November 14, 2017 at 2:16 PM ×

DXY broke down below the uptrend channel. Projected distance is roughly 1.70
This means a s/t target of roughly 92.70 which also happens to be horizontal supp/res.
Consecutive daily closes below 94 would pretty much open the floodgates.

November 14, 2017 at 2:56 PM ×

@IPA - I'm a buyer here. Model says it's a good entry so have to take it. If your analysis is correct, at least it will be quick and painless:)

November 14, 2017 at 4:21 PM ×

The Nikkei trade was nothing but a dream for them. Dream away in Paris why don't ya. Never been gladder to be on the receiving end of a distance call. "Fuck I love the punt"

November 14, 2017 at 4:25 PM ×

There got no idea how to trade the Nikkei, none.

November 14, 2017 at 4:35 PM ×

Alright, I'm going for my break. And I promise I won't send in any bowlers in the comments section on my behalf, I'll leave you alone.

November 14, 2017 at 4:40 PM ×

"Hello""...."Yeah, where are ya"...."oh,..that's good!"

Detroit Red
November 14, 2017 at 8:07 PM ×

@amp do you actually live on a beach in Thailand? Very impressed you're still up at this hour

November 14, 2017 at 9:43 PM ×

El_Erian for Fed VC? I've not read a single editorial of his that I didn't have to re-read only to conclude that he has nothing to say. Needless to say, it's been years since I've wasted my time on his musings.

I nominate TMM for Fed VC. They've actually got something to say, damnit!

November 14, 2017 at 10:46 PM ×

I think that $54.10 - 54.30 should serve as a launch pad on WTI. I understand the worries some may have over API and lower demand news out of IEA. One should not forget about the power struggle in the oil hot spots. There is a real fear of a war out there. Who knows how these things get started?

November 15, 2017 at 12:23 AM ×

A lot of goldbugs have switched to buying crypto as their new safe haven fad.
Also consider what happens in other countries wiht huge inflation - if they buy gold for theior own ghedging it pushes up global prices even in non inflationary countries.
Also look at USD action in inflationary times. It rarely follows the inflation up usd down rules .so looking at XAU/USD is clouded by USD not doing what is expected.
Also may be worth looking at inflation expectations rather than actual inflation as everything prices off expecations rather than reality.

I personally liek gold but would not consider the inflation angle as a reason to trade it.
If I want to hedge inflation in my life I d rather buy futures is things I consume to live.

Thanks for the posts guys ~Top stuff

Detroit Red
November 15, 2017 at 6:00 AM ×


I agree. Using breakevens here when I talk about “inflation” but to be more precise, I should’ve said “inflation expectations”, since breakevens are a market measure and thus has the expectation portion built into it.

Also, I think many gold bugs bought gold in 2011-2013 more in a speculative nature and used “inflation expectation” as the excuse if you will. I think that’s the major of those individuals who are trading cryptos under the same reasoning. I’m not sure if you can truly deem their goal as inflation hedging even if they explicit say so. Although I don’t have much evidence to back this claim, my gut feeling is that it’s not an unreasonable assumption.

November 15, 2017 at 1:50 PM ×

BOND SHORTS BEING EDWARD THE SECONDED. What a lovely way to start the morning.

CPI not really all that hot, more of the same, maybe the whisper number was higher. Short covering and a bit of risk off trade has seen yields sink again. Watch TLT spike, looks like it will fill a couple of gaps in the chart this morning.

The yen was already strong but USDJPY is taking a tumble on that CPI print. Who knew? (We really nailed this one last week).

2s10s 64bps, 5s30s 76 bps. At this rate we will invert by New Year.

November 15, 2017 at 4:36 PM ×

Eye-catching moves in NOK and SEK. Caught off-side in the former, but was lightly positioned. Not-so-lightly positioned, now;) I guess the narratives are "no catalysts" and now seeing "housing busts coming?" My guess is position-clearing, time-of-year, and maybe some programmatic buying? Low prices are a cure for themselves, in some sense. Lower SEK increases odds Riksbank actually starts withdrawing some accommodation. Guessing some re-evaluating their call for end QE at the December meeting after the CPI print, but a forward-looking bank is going to see FX pass-through effects of this move, so I wouldn't write-off that "catalyst" for later this year. In Norway, the pass-through effects matter less, IMO, because even with them, the central bank isn't going to move for some time given the inflation undershoot currently (which, they're at least very patient/pragmatic about). Maybe you get the rate path revised a bit in December. More a value call, where it's hard to trust your valuation because the current market price says prices are so out-of-whack that your model no longer works.

November 15, 2017 at 6:31 PM ×

ROBO is going to be hilarious sometime in H1 2018 when holders realize they're long a bunch of "highly cyclical industrial machine tool" companies and not "robot jobs apocalypse" companies. Not shorting now, though.

China is slowing. The driver of the world's real economy is slowing.

TSLA is going to be sold to Geely for $1 billion in 2022.

November. The best time of the year. When no one on November or December year-end wants to warehouse risk.

Got to love people buying nickel "because of EVs, you know." Sure, I'm sure spot will price your expected balance in the year 2023 today.

November 16, 2017 at 5:32 PM ×

Today's bounce was quite predictable given: (a) Nov options expiration tomorrow, and (b) Turkey week approaching, not to mention (c) Denis Gartman going short [it is almost a given that markets will bounce on this news].

It is noteworthy that we are seeing risky assets bid and vol sold, but that there is no movement in USDJPY. This is especially unusual for the case of Japanese equities, which are bid in the absence of its usual FX complement. Keep an eye on that.

The yield curve has not steepened today, some selling across the curve, all of which is consistent with the USD not doing much. We are therefore inclined to treat the "rally" in equities as a predictable short squeeze associated with the usual options-related adjustments, and we expect the vol selling to persist into next week's characteristically thin and generally meaningless trading. A good time to take a snooze, with an eye to reloading a few positions, beginning the day after Thanksgiving. Home gamers will be buying up their favorite tech stocks, FANGs, shale plays, electric car Ponzis and other silly shit... but LB will be busy studying the charts - especially looking for signs of breakdown in the small caps, dollar/yen, and high yield.

We remain long TLT, technicals look good, and we plan to stay there and ride the flattener for a while until there is a significant risk-off event or something changes to alter our view of medium-term inflation expectations.

This wasn't the BIG ONE, obviously (nobody here thought that it was), and we may not have seen the top. In addition, the next sell-off we see will not be the BIG ONE. But given the ingredients (margin debt, vol selling, algos, ETFs, passive investing) we are more convinced than ever that it is out there....

November 16, 2017 at 6:21 PM ×

@LB, folks like Gartman is why I don't ever turn my TV on any more. Total disgrace.

I am enjoying WMT rally. When I had turned bullish the stock in summer some here probably chuckled. I got hurt on the other side when AMZN made new high. But they can co-exist. Watch XRT take off into Xmas. The inverted h+s is going to hurt a lot of shorts. Some resistance to overcome at $42 and $44 but my ultimate target is $46.

November 16, 2017 at 6:31 PM ×

Took down EURNOK position this morning after going bazooka the previous early morning in the 9.75-9.78 range. Rarely go nuts in delta-one like that.

The bad news is I was too distracted by the flood of adrenaline to put on a dual digital in USDKRW, USDTWD. Awesome correlation setup to cheapen short USDKRW, but now TWDKRW having moved almost 2% in two days, the "trade location" isn't there anymore. Damn, damn, damn. Damn.

Going into 2018, the default position seems to be long FANG (US structural growth) plus long non-US equities (early cycle vs US's late cycle). I suspect a growth disappointment though. This year, it was China, US shale spending, and rebounds in places like Brazil and Russia from recessions, but what takes the growth baton in 2018? I don't see it in the US (why would companies invest when end-demand is consumers with low savings rates, meager real wage growth, and poor demographics?). Maybe a better case to be made for European capex, but still .... All the data is pointing to slower growth in China, and that's hard to offset.

November 17, 2017 at 8:19 AM ×

FDAX has got a little TLC over the previous two sessions. It is up around 15% year to date. The recent sell off from highs can be attributed to any number of reasons (cough, excuses), Siemens, Allianz, higher Euro, slowing China data(huge export market) ECB and on a smaller excuse - profit taking.
From a technical aspect a reversal pattern is taking place on the daily chart(if you are into that kinda of thing) while more advanced technical objectives were played out.
So johno, and Shawn (re:French equities a while back) I would tend to agree that is more upside here than US.

*Disclaimer, while not in the same league as Gartman i have be known to have my moments.
Enjoy the weekend lads.

November 17, 2017 at 12:07 PM ×

Skr, no need to put in a stock market disclaimer. We process everything here as if your were our PM going into bat for the English elite. You won't ever get a penny's day of work out of me.

November 17, 2017 at 12:18 PM ×

Wall Street , and the City of London. Leave a poor mug alone. Give your trading seat to some else. I don't won't party to any of it. Its not me. Accept it. I don't want that life.

November 17, 2017 at 12:22 PM ×

Keep your royal hand. Save it for someone else. This guy has folded , and is very happy to lose this hand. My game will peak in Asia. Hard.

November 17, 2017 at 1:21 PM ×

Not a Scobby doo what that means.
Can you please give me either, Benjamin Franklin's glasses from Nlational Treasure or two of whatever your taking!
Until then amps...

November 17, 2017 at 1:40 PM ×

@Skr, this market goes on and on and on. With one hand trying to handle the other. The turd on Wall Street has won at his game of frustration. But, he has lost at his attempt to make sure the wicket that I am supposed to bat on is an ant shit nest by the time I get to the crease. I came here to this blog to prepare to bet. The British elite and there cousins in America are just like the same as their lineage of horse trainers, they expect you to shovel the shit each morning , and when race day comes your not allowed to think and express yourself to anyone to make a quid yourself. There bullshit. That's why I went to Japan, to see how they operated over there.

November 17, 2017 at 1:52 PM ×

@Skr, nice song, but not interested.

November 17, 2017 at 4:27 PM ×

Notice that the real rate associated equities have broken down recently moving from broadly range bound for so long to what I suggest is now a down trend. Plenty of room I think for these to establish a lower range in line with where the market thinks we will be on real rates in the UK.

November 18, 2017 at 5:14 AM ×

So maybe there is a big stop hunt in the works for Gold above 1,300 next week? Weak dollar, uptrend channel support, thin holiday trading, whatever... It just wants to go back up. My ultimate target is 1,500 with 1,385 as a near-term objective.

abee crombie
November 18, 2017 at 5:15 PM ×

Johno. Couldn't agree more on robo. Was thinking the same thing though I am nursing some very offside positions playing the China slowdown so waiting for more confirmation still. Yes nickel is ridiculous too, though to be fair it's not far off its 2016 low so maybe the though is you don't have much to lose.

Chinese data is slowing but you had some holidays and party stuff in sept oct so I don't want to get too bearish. But when new loan growth for q1 disappoints, which it likely will, then markets wake up. Let's see.

Action in some single name stocks still looks dubious to me. Wmt going bananas, yet trading at 21x. Really. Earning are still lower than in 2014.value guys bought it. Have to think they are sellers here. But computer quants love it bc it has moments and quality. Seeing the same sort of value underperformance and momo out performance jump in. And with hy spreads widening its not a good sign. For sure this is just act 1 but let's see what hy, eu and jp do to close out the year. The junk always sells off first, not the good merchandise like fang. Also watch some fang hy issues from tsla and nflx.

So tencent is one of the largest companies on earth, trades at 30x ebit and makes most of to money from video games. Great company but when u are a mega cap that multiple needs to come down. Look at aapl. But as long as growth is there ppl continue to pay up. The other leg of tech, semis are seeing real increases in prices and demand. Good job. But let's not remember this is still a cyclical business.

Unless capex is going to really improve due to tax reform and eu confidence, which can replace lost Chinese investment, estimates for growth are too high. When that translates into corporate earnings, I'm not quite sure but I think pretty soon.

November 19, 2017 at 10:41 PM ×

@abee, I think WMT is at ATH due to the fact that their online growth is accelerating and they are finally "getting it". Also, ppl have been worried about AMZN/WFM price cuts slicing into grocery side of WMT. Well, that side did really well in the last qtr. So it is sort of a relief rally and an absolute annihilation of WMT shorts who added to positions on AMZN/WFM deal. I think it has a bit more room to run on that (prob until Xmas) before taking a breather. Speaking of grocery, watch KR do some serious damage to shorts here as well. Another favorite of mine on short squeeze idea.