Since a peak earlier this year, GLD/TLT has entered a bear market, down nearly 23% from the peak.
At the time I expressed my surprise at this move, as it coincided with a steep rise in the oil price - which I would see as gold bullish and bond bearish. We have also seen a period of pronounced dollar strength.
What seems to be driving movements in GLD, TLT and DXY is short term interest rate expectations in the US. The spike in the oil price has coincided with a rise in 2 year US treasury yields, as tighter Federal Reserve policy has been priced in.
The question now then, is do I expect the Federal Reserve to get even more hawkish? Probably not. PPI, which tends to be more volatile than CPI, has tended to be better at predicting Federal Reserve dovishness or hawkishness. Almost all bear markets are preceded by a spike in PPI, and falls in PPI mark dovish turns. Currently, we are at 9.1% YoY - one of the higher numbers seen.
You do not have to be a genius to understand that PPI tends to move with the oil price - which after spiking earlier this year, is now turning lower.
As a sense check, I also look at CRB Food Stuff Index, and this remains with in the recent range.
What I think is likely is that softer inflation numbers will start coming in, and President Trump, who has seen his popularity fall with War In Iran, will get impatient with either a strong dollar or high interest rates or both, and this should reignite the weak dollar trade. I particularly like this because of three other reasons. Firstly, the Renminbi remains at strong levels. If it was weakening, I would worry about gold and short TLT.
Secondly, strong dollar trades, as seen with weak Yen positioning is back at near peak levels.
Open interest in gold has collapsed to lowest levels in at least 10 years.
But to be clear, this is a political bet first. And that bet is that President Trump starts putting pressure on the Fed and his trade partners for a weaker dollar and lower interest rates. The economics and positioning are supportive - but it is a bet that with lower oil prices, weaker inflation prints will encourage President Trump to return to this theme.
