As stocks remain under great pressure and Treasury bonds come under pressure, the question is “where to put your capital?”, leaving aside shorting (speculation) and trading the ups and downs (also spec) for now.
First of all, there has always, since ancient times, been a place to hide. It is shiny and heavy and has been used as money for millennia. Second, if yields continue upward short-term bonds (0-3yr) will roll over fast enough to provide good income even as bond prices ease. At least in the non-cash category. On that note, cash is and has been the best risk manager, and it too is paying income (until/unless the Fed panics).
As to gold, the scariest thought (for we Americans, at least) is the old China/Japan dumping Treasuries fear. That has not been realistic through decades of codependent bubble-making by the world’s developed economies. But today in a bloody war that sees its players sitting at a poker table, each trying to have the most impenetrable poker face (I feel like Trump has a poker face molded in orange cast iron and Chinese leaders probably have their “long game” resolve) may not the “dedollarization” theory finally become reality?
Gold is up this morning, having held its 50 day average on the pullback. USD is down and of course Treasury bonds are down (yields up). Would this not be what dedollarization looks like? If large economies are at war with US bonds (debt) and pulling out, that money has to go somewhere. I think it is entirely possible that Trump’s bravado and mayhem can be boiled down to one tired old macro parlor trick:
Currency devaluation
Can the US maintain status as the keeper of the world’s reserve currency through this global war? Unlikely, if it persists. Over the last couple decades it’s usually been that liquidity seeking herds run to the “safety” of USD and US Treasuries. The Gold/Silver ratio is rising, indicating a gathering liquidity crisis. But our 2001-2004 analog (which should not be expected to play out exactly as it did then) would see USD weak, Gold rising vs. silver and a global shift of some sort. Recall the big “China trade” that developed from that era.
While this chart was created as a positive macro consideration for the gold stock sector, it also has other stories to tell. One of which was that King Dollar was kicked off his throne and asset markets became much more global in their equity. Right now the world is voting to hide in gold and relative to USD, its own sovereign currencies. It is opting not to hide in USD and Treasuries. It’s only one dynamic day in a dynamic week. But our analog is getting more juice and we should calmly watch and adjust to the situation as it unfolds going forward.
