New Secular Gold Bull Market

Amid growing calls of this being just the beginning of the next secular gold bull market, Bloomberg late last week penned a nice simple article supporting this thesis titled “The Gold Rush Heats Up as Sub-Zero Yields Spread”.

As the title suggests the article concentrates mainly on the fact that we are in an environment of zero to negative real interest rates and that gold “offers something the growing pile of negative-yielding bonds doesn’t -- inflation protection.”

As we’ve reported before June saw gold smash through the $1350 resistance as it became clear the Fed was turning to easing or lowering interest rates so soon after the failed attempt to hike them.  On Friday that price hit $1453, its highest in over 6 years on more poor economic data, growing expectations of a 50 basis point cut this month and a (since weakly corrected) statement by one Fed member that we are headed to zero rates soon.  That silver rallied 8% in the same week was seen as very bullish too.

They go on to map the inverse relationship between real interest rates expectations (headline minus inflation measured by the yield on five-year inflation-linked Treasuries) and the price of gold.  Whilst most know there is a strong correlation between the two, that correlation just hit a high never seen before.

And is it any wonder as the world saw a record $13 trillion of negative yielding debt that now perversely even includes junk bonds.  The article points out too that whilst that is the number everyone is quoting, it’s actually a pre inflation figure and when inflation on general prices is added in it jumps to a staggering $25 trillion.  Add in 2 more cuts by the Fed this year and data compiled by Bloomberg has that figure at $30 trillion before the end of the year.

As further evidence of the shift to gold beyond what we have previously reported on ETF’s and other proxies, they present the move of gold into all high security vaults registered with the London Bullion Market Association and only up to March before the rally got a head of steam from April.  247m oz is around 7.7 tonne and demonstrates the amount of physical bullion held by people outside of the ETF’s, mutual funds and other paper proxies which last we reported was ‘only’ 93m oz.

Their conclusion:

“Not Done Yet

But is the rally getting stretched? Maybe not. While hedge funds increased bullish bets on the precious metal, the aggregate long position on futures as a share of open interest is only about 36%. That’s still below the peaks of 2011, 2016 and 2017, suggesting there’s some room for prices to rise as money managers may allocate more to bullion. And while holdings in exchange-traded funds have risen this year, the total amount of bullion in funds still isn’t as high as it was at the end of 2012. And some, like Bridgewater Associates’ Ray Dalio, suggest the market may just be at the start of a period that will be very positive for gold.”