I know a lot of subscribers read Tom McClellan, an analyst/newsletter writer who looks for market clues in market correlations and relationships, much like your letter writer does.
In his most recent emailed article he notes that the TIP (inflation protected Treasury bond) ETF is diverging gold in a negative way as it is declining while gold is rising. That is true. It is a negative divergence to gold IF you believe that gold’s main utility is about inflation. Here is a chart showing the recent history of each, including the most recent negative divergence. The TIP chart includes dividends.
But my operating view is anti-inflation and just as I want to see gold out-perform inflation expectations (we use RINF as the gauge there) we want to see it out-perform TIP as well. Similar animals with different stripes. TIP, including dividends got hammered just as Treasury bonds got hammered. Just not as much during the height of the inflation hysteria. Remember that something major happened in bonds last year that ripped apart previous trends. While TIP is better during inflation than unprotected bonds, it still gets hammered if inflation fears result in rising overall yields.
I am not an inflationist at this time and am very open to a new phase of limited Fed ability to inflate, which could change the long-term game in gold. Remember, as a gold mining bull you’d want to see gold out-perform the inflation sensitive stuff, including RINF, TIP, TIP ratios to TLT and IEF, and a host of inflation sensitive assets. This chart shows GLD recently doing just that vs. inflation expectations, TIPs and unprotected long-term bonds. TIP, by the way, is only relatively inflation protected. As noted above, it logically got hit with bonds overall.
Bottom Line
If conventional wisdom wins out and some of the extreme indicators we track like M2, the 30yr yield ‘Continuum’ and others are not forecasting a major change in the decades-long trends in the macro, it is very possible I will have been wrong to think about a real post-bubble contraction as we go back to business as usual and linear analysis wins the day (or year).
But if our thesis is that the game has changed I would not worry too much about correlations like gold and TIP that held sway (to a degree) over the last couple of decades. That is why I am planning for 2023 to be so exciting. It has a chance to be a rule breaker. Rules that were unbroken for 20+ years. Let’s keep open minds both ways for now.
Thanks Gary and one of the top 10 articles you’ve ever written IMHO. So very clear and easy to understand. I appreciate your “Bottom Line” final quote “Let’s keep open minds both ways for now.”
I might also say “Hope for the best (a gold bull that shakes out the everything bubble era and rebalances valuations across the board) but prepare for the worse (a continuation of the Goldilocks era that has blown bubble after bubble only to eventually collapse injuring millions of investors with serious life damaging consequences to their portfolios).
Thanks for your ever clear analysis. And, good luck on the long/short side. To paraphrase good old J. Livermore “There is no bull side or bear side, there’s only a right side.”
That’s funny John, because I was thinking the opposite. Was I able to get clear points across? It’s hard when things are breaking. You’d have to be a swami to clearly interpret it all ahead of time.