The Gold-Yield Gap
Since 2018, Gold has pretty closely tracked the inverted real yield on 10-year US Treasury bonds. Recently, however, a fairly large gap has opened between the two. Will gold close the gap with inverted bond yields, or vice versa?
Generally speaking, it looks like gold has led bonds for most of this period. That suggests that gold investors are a little quicker to react to news that might affect inflation expectations. Honestly you might be able to do pretty well for yourself by going long or short bond funds based on signals from the gold market.
Gold has weakened partly in reaction to US dollar strength in the first two months of 2021. The dollar index broke out of its downward wedge and looked like it might move higher:
There are signs of deflationary pressures on the dollar, including a couple recent overnight repo shortages of the sort we haven't seen since the early stages of the pandemic. The Fed has been responding to this pressure by growing its balance sheet and increasing bank reserves. Janet Yellen currently has plans to pump an additional $1 trillion into bank reserves. All of that's bearish for gold and bullish for the US dollar and bond yields.
However, there's some potentially game-changing news this morning: Congressional Democrats are talking about passing a $3 trillion jobs and infrastructure bill. A $3 trillion spending bill could significantly weaken the US dollar and could cause a nice bump in gold. With gold at a very significant support level, I think it's ripe for at least a short-term mean-reversion play, if not a swing all the way up to meet the inverted real yield line.
Long gold, long dollars, and short bonds is a potential way to play this until we've closed the gap.
Generally speaking, it looks like gold has led bonds for most of this period. That suggests that gold investors are a little quicker to react to news that might affect inflation expectations. Honestly you might be able to do pretty well for yourself by going long or short bond funds based on signals from the gold market.
Gold has weakened partly in reaction to US dollar strength in the first two months of 2021. The dollar index broke out of its downward wedge and looked like it might move higher:
There are signs of deflationary pressures on the dollar, including a couple recent overnight repo shortages of the sort we haven't seen since the early stages of the pandemic. The Fed has been responding to this pressure by growing its balance sheet and increasing bank reserves. Janet Yellen currently has plans to pump an additional $1 trillion into bank reserves. All of that's bearish for gold and bullish for the US dollar and bond yields.
However, there's some potentially game-changing news this morning: Congressional Democrats are talking about passing a $3 trillion jobs and infrastructure bill. A $3 trillion spending bill could significantly weaken the US dollar and could cause a nice bump in gold. With gold at a very significant support level, I think it's ripe for at least a short-term mean-reversion play, if not a swing all the way up to meet the inverted real yield line.
Long gold, long dollars, and short bonds is a potential way to play this until we've closed the gap.
Comment:
So far, so good for this trade. Bonds down and gold up sharply today.
Comment:
Update: treasuries working on closing the gap.
