As I quipped in an interview last week, it’s almost as if there was a big argument, and Felix kicked Oscar out onto the street. I guess it was one clever way to talk about the sudden divergence between Treasuries, which have continued to be strong performers, and gold, which last week broke below no less than two key support levels.
First, a word about the bond market. Increasingly in recent days, all those who had been caught wrong-footed by the 2014 bond rally have more constructively tried to figure out why, rather than just throwing up their hands. On that score, they have come to a few conclusions.
First–and especially after the ugly revision to first-quarter GDP (down a full 1.0%) and the continuing preponderance of poor results where both retail sales and the housing market are concerned– some are starting to admit that the economy is not doing all that great after all. Thus, it is no mystery that the bond market is ostensibly “pricing in” both slow growth and a benign inflation environment. Second, there is a greater realization that–even after their recent drop–rates are out of whack compared to Germany and Japan. Last but not least, the realization that present annual federal deficits are considerably less than they were a few years ago has resulted in (crazy as it might sound) a shortage of Treasuries.
With pension funds, some institutional investors, insurers and others effectively required to own government securities, the relative lack of new issuance has kept demand in a sense stronger than the supply and, thus, is exerting upward pressure on prices. (NOTE: This is one reason as well, as I discussed a while back, that the Fed has had the ability to cut back its money printing without driving rates up.)
While the bond market is likely to consolidate for a while, all else being equal (the 10-year Treasury’s yield a few days back touched a key technical level of 2.4%, which will take some doing to get below) none of these generally supportive influences for Uncle Sam’s I.O.U.’s is going away any time soon. Longer-term, I have little doubt that the Fed will attempt to further compress interest rates. And even if the recent “hotter” inflation statistics prove not to be aberrations but continue, we already have Janet Yellen’s promise that such a thing will be all but ignored and that real interest rates will stay negative–if not become more so.
This continues to be one of the major anchors to the long-term bullish case for gold; yet while the bond market seems to “get” all this, gold does not at the moment. As we saw for much of this year so far, the same “cocktail” of factors–some of which I listed above–should be continuing to support both members of “The Odd Couple.” But gold is now decidedly on the back foot, especially after 1) breaking downward out of its recent narrowing trading range, 2) closing below previous closing support in the $1278 per ounce area and 3) below its last-ditch Fibonacci retracement level of around $1262 per ounce.
The good news for the yellow metal thus far is that these technical failures have not invited either heavy additional selling or a new bear raid.
Indeed, especially in comparison to most other areas/assets classes, trading in precious metals right now seems somewhat of a wasteland. Neither bulls nor bears seem to be exerting much influence. And as I have been suggesting where the latter are concerned, the underlying case for precious metals is looking much better today than it was a year ago, when technical failure such as the last week’s would almost assuredly have caused a rout, and taken us back down to the bigger support level already in the $1180-1200 area. Relatively few, it seems, have the nerve to short gold these days.
As was the case in 2013, gold is no doubt suffering (but not to the same extreme) from the fact that the stock market still refuses to break. As long as the headlines show the major averages eking out new highs, precious metals won’t get much attention. We may go a bit longer with gold simply drifting; perhaps to test that $1180 level once more. But for the most part, I have a hard time envisioning much worse than that. In any event, with the E.C.B. poised to ease, rumors of China doing more of the same and the likelihood of the Fed joining them sooner or later, the central banks will remain supportive.
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