Looking at the 2 parabolic advances of gold in the 70s, the ~50% drawdowns that followed both took 2 years to play out. We are only 3 months into this drawdown, kinda worrying/problematic, can you imagine the tears on Twitter?
Then maybe there is a second chance run again too.
Yes - that why the TLT short part is important.... the way I see it, gold wants to go up due to the fiscal policies, BUT can be restrained my monetary policy.... so theoretically, GLD/TLT should be much less volatile that just long gold...
I recall at the start of the year spit-balling energy as a hedge, missed the boat on that one but ASX:WDS is looking better with nicely franked carry. Noting your comments below on that to Gordan... Thanks Russell!
The JGB/Treasury spread observation is the most structurally important point in this piece. US 30-year yields at roughly 1% above JGBs in absolute terms, and near the lowest percentage premium on record, creates an asymmetry that has almost nothing to do with Fed funds pricing and everything to do with the demand side of the long end. Japan needs to sell Treasuries to defend the yen.
China is a net seller. The UK premium is largely basis-trade driven, not strategic. That leaves the official holder base structurally thinner than at any point since the dollar became the reserve currency.
From a SAA perspective, Alpha Research Capital Market Assumptions price US Treasuries at 4.33% annualised with the highest conviction in the table, standard deviation 0.4. That conviction level was set before the 30-year hit 5.18% and before the JGB yield broke above 2.5% for the first time since 1997. If the spread reverts even partially toward historical norms, the SAA expected return for Treasuries is materially understated at current yields, but so is the price risk.
The GLD/TLT trade is not a 50-50 bet. It is a bet that the short TLT side has more structural support than the long gold side does at current levels. That is a different trade from where it started.
jeffrey gundlach always says that we should get rid of FED and solely look at 2y yields, which are clearly poiting higher, and already smelling higher inflation numbers and higher twin deficits in the US, no pressure for DJT to address deficits, so why should gold fall as with any coming crash in equities, YCC will come and FED will again start buying back bonds and on we are for QE12 or is it already QE13...??? look at mining companies that have leverage on gold/silver moves, much better play even if oil/gas goes higher as margins will be HUGE when gold moves higher...
The risk here is that AI led growth does lead to the fed to raise rates... and like the dot com - you are left with everything but AI falling.... Of course when AI fails as a trade, you are right about gold, but you could be wrong for a year or two..
Any thoughts on oil here? Oil vs gold was until recently very negatively correlated. In my view the conflict is nowhere near the end, at least re Hormuz opening. Another big downside risk for gold is oil moving higher again?
Thanks Russell. Have you read Michael Green's work / thesis on the (passive) indices impact (and re-balancing) on bond buying? What are your thoughts? He highlighted it in a upublic letter to Bessent. I can send it over (or a portion of the text) if you are not a paid sub.
Most passive funds that do dumb things get destroyed... XIV was.one example. USO is another. TLT yet another. IBiT another. You can't just pick.and choose which passive fund causes mispricing.
Looking at the 2 parabolic advances of gold in the 70s, the ~50% drawdowns that followed both took 2 years to play out. We are only 3 months into this drawdown, kinda worrying/problematic, can you imagine the tears on Twitter?
Then maybe there is a second chance run again too.
Yes - that why the TLT short part is important.... the way I see it, gold wants to go up due to the fiscal policies, BUT can be restrained my monetary policy.... so theoretically, GLD/TLT should be much less volatile that just long gold...
TLT short was/is problematic for retail/me.
I recall at the start of the year spit-balling energy as a hedge, missed the boat on that one but ASX:WDS is looking better with nicely franked carry. Noting your comments below on that to Gordan... Thanks Russell!
You can go long TBT. Not as good as short TLT, but still works.
The JGB/Treasury spread observation is the most structurally important point in this piece. US 30-year yields at roughly 1% above JGBs in absolute terms, and near the lowest percentage premium on record, creates an asymmetry that has almost nothing to do with Fed funds pricing and everything to do with the demand side of the long end. Japan needs to sell Treasuries to defend the yen.
China is a net seller. The UK premium is largely basis-trade driven, not strategic. That leaves the official holder base structurally thinner than at any point since the dollar became the reserve currency.
From a SAA perspective, Alpha Research Capital Market Assumptions price US Treasuries at 4.33% annualised with the highest conviction in the table, standard deviation 0.4. That conviction level was set before the 30-year hit 5.18% and before the JGB yield broke above 2.5% for the first time since 1997. If the spread reverts even partially toward historical norms, the SAA expected return for Treasuries is materially understated at current yields, but so is the price risk.
The GLD/TLT trade is not a 50-50 bet. It is a bet that the short TLT side has more structural support than the long gold side does at current levels. That is a different trade from where it started.
jeffrey gundlach always says that we should get rid of FED and solely look at 2y yields, which are clearly poiting higher, and already smelling higher inflation numbers and higher twin deficits in the US, no pressure for DJT to address deficits, so why should gold fall as with any coming crash in equities, YCC will come and FED will again start buying back bonds and on we are for QE12 or is it already QE13...??? look at mining companies that have leverage on gold/silver moves, much better play even if oil/gas goes higher as margins will be HUGE when gold moves higher...
The risk here is that AI led growth does lead to the fed to raise rates... and like the dot com - you are left with everything but AI falling.... Of course when AI fails as a trade, you are right about gold, but you could be wrong for a year or two..
Any thoughts on oil here? Oil vs gold was until recently very negatively correlated. In my view the conflict is nowhere near the end, at least re Hormuz opening. Another big downside risk for gold is oil moving higher again?
Personally I think oil is done. Shale and the rise of EVs makes oil yesterday's commodity. Wont stop electricity prices from rising though...
Excellent analysis! I look forward to seeing how this one plays out. I wonder how silver will play out too
Thanks Russell. Have you read Michael Green's work / thesis on the (passive) indices impact (and re-balancing) on bond buying? What are your thoughts? He highlighted it in a upublic letter to Bessent. I can send it over (or a portion of the text) if you are not a paid sub.
https://www.yesigiveafig.com/p/what-the-treasury-needs
I think the impact of passive funds is overstated. Share buy backs or the Fed buying debt, this has an effect - but passive funds not so much
Thank you. Is it based on your data or hunch or something else?
Most passive funds that do dumb things get destroyed... XIV was.one example. USO is another. TLT yet another. IBiT another. You can't just pick.and choose which passive fund causes mispricing.