In recent weeks we’ve looked at a number of different markets that don’t seem to agree with the bullish opinion of US stocks. Emerging markets in general, equity markets in China, Hong Kong, Singapore, and South Korea in particular, copper, and US 10-year treasury yields, are all telling you to be much more cautious about the state of the global economy.
Gaining particular note of late is the ‘flattening yield curve’. This is the result of declining 10-year US bond yields and rising yields on the two-year note. It’s the result of long-term bond investors seeing an economic slowdown (which therefore pushes bond prices up and sends yields lower) versus the reality of the Federal Reserve raising cash rates.
What does it mean? As the Wall Street Journal reports:
‘Many view a flattening curve as a sign of economic slowdown, even though few see a recession on the horizon, leaving analysts debating the signal’s meaning. Investors may get more clarity from the week’s corporate earnings reports.
‘Steady economic growth has left some investors doubting that recent gains for longer-term bonds can hold. Speculators have piled into near-record bets against 10-year Treasurys in the futures market.’
Yields continue to fall
Hmmm. Despite a massive ‘short’ position on 10-year treasuries (meaning a big bet on rising yields) in the futures market, yields have continued to fall in recent weeks.
Given the strength of the US economy and impressive corporate earnings, you would think longer term bond yields would rise, right? Is the bond market mispriced? Are the speculators in the futures market set to make a killing as this week’s quarterly earnings report confirm the strength of the US economy?
Hey, don’t ask me!
My guiding principle is that I know nothing. The sooner you come to this conclusion, the easier it is to work out what might be going on. Because that way you want hang on to your (probably incorrect) biases.
In my humble opinion, this is what happens when we’re late in the cycle. The bulls continue to see blue sky, while the bears see storm clouds gathering.
The thing is, both are right. It all comes down to timing. In the short-term, more evidence sits on the bulls’ side. In the US especially, tax cuts and loose fiscal and monetary policy create a very favourable environment for stock. That’s why earnings will continue to be strong in the three months to June.
But historically, we’re now deep into the cycle. The Fed is set to raise rates at a faster pace — twice more this year (making four rate raises in 2018) with the same again in 2019. The Fed nearly always tightens into the end of the cycle. They help to create the end of the cycle.
So as far as I can tell, the bulls are right for now, while the bears will be right down the track.
Gold is a barometer of risk
As far as the timing on that goes, it might pay to keep an eye on the gold price. It’s been under pressure lately, at least in US dollar terms.
That’s because there really hasn’t been any reason to hold gold. The economy is strong, corporate earnings are robust, and short-term interest rates are rising.
Gold is a barometer of risk. If investors don’t see much risk around, then they’re not going to buy gold. It’s interesting to note that falling 10-year bond yields (a sign of risk off) have not been confirmed by a rising gold price. It’s just more mixed signals from a confused market.
But a close look at the gold price tells you it’s at a critical juncture. Recent weakness in the US dollar gold price sees it trading right on its long-term trend line.
The chart below is a weekly price chart of gold since 2009. You can see the rapid advance that marked the top of the bull market, followed by a prolonged bear market.
Then, the bottom in late 2015…
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Read this BEFORE you buy gold: Why one resource expert believes the gold price could be headed lower in 2018. Free report (download now).
Is now the time to buy gold?
Since then, gold has been in a bull market, albeit not a very inspiring one. Still, the trend is towards higher prices, and the market now rests right on this bull market trend.
A break below here would be a concern. It would suggest that gold is going nowhere at best, or returning to a bear market at worst.
On the plus side, gold is now in ‘oversold’ territory on the weekly chart. That means the market is out of balance and should be due for a rally soon.
Also, gold is out of balance in the futures market. Short positions keep piling up. In the ‘managed money’ segment, which is a great barometer for financial sentiment, traders are now ‘net short’ on gold for the first time since January 2016, right when the bull market got underway.
There are a few reasons to think, then, that gold could be about to rally. It’s just lacking a spark…a catalyst. And right now, I’m struggling to see what that could be.
This could be a good contrarian sign. When it’s not at all obvious that an asset could increase in value, it means no good news is priced in.
So keep an eye on gold, it could be about to rally sharply.
Editor, Crisis & Opportunity
PS: Read this BEFORE you buy gold: Why one resource expert believes the gold price could be headed lower in 2018. Free report (download now).