The Gold Bugs are Back

Don’t look now, but the Golden child of commodities is creeping back in the limelight – riding a near 20% up move so far this year back into relevance (or at least headlines).  We’re talking about the so called ‘barbarous relic’ Gold, of course:

Three days later, Gold saw an even bigger gain of $50 an ounce spike, or around a 4% increase. What’s going on? What’s pushing the favored market for “the end of world types” higher? Look no further than interest rates, and the Fed’s apparent change of heart on raising rates in 2016.  The logic goes – if the Fed doesn’t raise rates, we’re looking at paper money yielding essentially $0, with the real possibility that you would have to pay to have your money held in a bank. For those who view Gold as a store of value, akin to another currency, they would much rather hold Gold than a paper currency at risk of being devalued.

CME Group Senior Economist Erik Norland took a deeper look into whether this Gold rally is sustainable or just a flash in the pan, and one of the most interesting findings is Gold’s negative correlation to Fed Fund Futures contracts (which we talked about it detail here). Specifically, how the negative correlation between the two increased dramatically after the fed raised rates.

On a daily basis, from January 1, 2015 to December 16, 2015, gold correlated at -0.30 with the daily change in the Fed Fund Futures rate (100 minus the price) as shown on Figure 2.  Since the Fed’s December 16 rate hike, the correlation has become even stronger: -0.57. When expectations for Fed rate increases rise, gold tends to fall; and when expectations for Fed rate moves diminish, gold tends to rise.   And, while we do not think the Fed would adopt a negative rate target for federal funds, as it would be punishing for bank earnings, even thinking about negative rates in the U.S., gives gold prices a boost.

Fed Funds Gold Negative Correlation

Fed Funds Gold Negative Correlation After Hike(Disclaimer: Past performance is not necessarily indicative of future results)
Charts Courtesy: CME Group

Granted there have been less days since the fed hike, so the correlations are bound to be a little skewed; and it’s not too hard to see how all of the other market forces out there currently might be pushing the increase in negative correlation.

…there has been a sea change in expectations: amid collapsing oil prices, falling equity markets, and roiled credit markets, Fed Funds Futures by February 11 were pricing a small chance that the Fed might even cut rates.  Another round of policy tightening was not priced until 2018. And, in response to actions by the European Central Bank (ECB), the Swedish Riksbank, Swiss National Bank, and Bank of Japan, Fed Chair Janet Yellen indicated that the Fed would study the negative rate policies being adopted by their peers.

Finally, Norland warns that the historic crude oil move, could actually put a cap on any gold rally, in part due to cutting mining and production costs, which could increase supply.

Lower energy prices:  Mining and refining gold is highly energy intensive, and lower oil, natural gas and coal prices will reduce the cost of doing business… which may limit further upside in the long run.

Crude Oil and Gold

At the end of the day – we’ve never been big believers in Gold as a standalone investment, just like Warren Buffet .  For our money, we would much rather have exposure to moves in Gold (both up and down) via a dynamic trading strategy (which is the same logic for anyone looking to play a bounce in Oil prices, coincidentally – see here).  But trying to dissuade a Gold Bug is about as easy as pushing a string. They can’t even see the 20 year sideways price action between 1983 and 2002 or the near 50% drop from the 2011 highs. All they see is the $400 to $1,800 per ounce move and possibility of Armageddon.

And who knows, maybe the onset of negative interest rates is the start of some sort of Gold friendly market debacle. Only time will tell, but why put all your eggs in the Gold wheel barrow is a binary bet with just two outcomes – good or bad. Choosing an alternative investment with both exposure to Gold moves AND the ability to make money no matter what Gold does seems like a better idea than storing a wheel barrow full in a cave.

Goldtimer_comic

P.S — If you’re interested in the Gold commodity conversation, here’s our previous commentary.

  1. The Surprising Connection That The Worst Performing ETF’s Share
  2. Goldfinger, Gold iPhone, and Gold Backwardation!
  3. Who’s Meddling with Metals?
  4. You Think Gold’s been doing Bad, Check out Gold Miners…
  5. Gundlach’s Next Call – Short Gold
  6. RAID for the Gold Bugs
  7. Gold Forming Classic “Frowny Face” Pattern
  8. Smiling While Gold Sinks
  9. Kicking Gold While It’s Down
  10. Platinum Outshining Gold in the New Year
  11. Coinage Takes a Well-Deserved Nosedive
  12. Gold and Stocks Decoupling?
  13. The Best Way to Lose Money on Gold

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Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.