Treasury Bonds, stocks and precious metals during a key macro phase
Treasury Bonds
In originally anticipating a Yield Curve flattening and potential Goldilocks environment, long-term Treasury yields were expected to be weak relative to short-term yields. The operations in the bond market engineered by Bessent and Warsh were noted in August: Operation Twist 2.0? Bessent & Warsh Work the Yield Curve
The idea was that support in some form would come to long-term Treasury bonds while the Fed’s impulse toward hawkishness on the Funds Rate would keep short-term yields relatively firm. That has played out as expected in that the Yield Curve has clearly resumed its flattener in the short-term.
I anticipated this disinflationary bond market signaling playing out in the form of Goldilocks prior to the mid-term elections. A noxious combo of stock market strength and precious metals weakness.
Well, half right!
Stocks and Precious Metals
Thus far, the US stock market has been bearish in many of its components and sectors, but the S&P 500 has rotated internally, to thus far avoid trouble. There is, however, the issue of an unresolved negative divergence (red boxes) to price by daily RSI.
With the broader indexes and leaders like Semi and Tech having corrected you can’t say that Goldilocks has favored stocks. Not at all.
Indeed, with Semi and the AI trading taking a hard punch to the chops I believe the idea is ‘get ’em into Treasuries no matter what!’ to quell a developing debt crisis (of confidence) in the near-term. I don’t think whatever impotent efforts Scott “the House” Bessent is making to support long-term Treasuries are the main drivers.
Among the main drivers are likely those being flushed out of the crowded Semi/AI trade and into perceived safety. This, of course, on cue of the media’s eyeball harvesting. The new Treasury herd had to come from somewhere (previously hot stock plays) and had to be driven by something (in part the media and its expert contrary indications).
I believe the odds are better than even that when the bond market pump is complete items like the Semi sector may make a comeback and the broad market may yet get its seasonal rally.
At this time I am very heavy in cash/equivalents paying income. I hold some BioPharma, which is doing well and a couple Software plays, also doing well. And I bought 7-10 year Treasuries back on October 5th in anticipation of what is going on now in the bond market.
Today I tested the theory that the machines may rotate back to Semi by adding a formerly high flying Semi stock I had long ago sold. That stock is the richly (over?) valued Astera Labs (ALAB), which gained its valuation by growing like a weed. It is added at the 200 day moving average with a low tolerance for risk, should that level be breached.
There are plenty of others on watch should the stock market find a stable bottom. There are few signs yet that a stable bottom has been reached.
As for the precious metals, gold has done the expected and coughed up a lung in the face of the disinflationary signaling of the flattening yield curve. Logically, the more inflation sensitive silver has done even worse.
Worse still, the gold miners are impaired under the pressure of the Gold/Oil ratio (GOR). The miners’ product has crashed in relation to a primary mining cost driver.
This is why among my very light positioning are quality Royalty companies like Royal Gold (RGLD) and Wheaton Precious Metals (WPM) and a few favored Exploration/Development plays. The Royalties have negative exposure to bearish metals, but they do not fundamentally leverage costs negatively the way miners do.
The GOR is a horrible fundamental picture for gold bugs. There is no other way for perma-promoters to spin it. Here is the bombed out GLD/USO chart.
In contrast to this, another ratio says “not so fast, bear boy!”
The HUI/Gold ratio merely sits at the original NFTRH downside target at the 200 day moving average. In other words, the chart is a picture of an internal sector view that does not yet seem to believe that the GOR above means destruction for the sector. If gold is tanking badly in oil terms, why are the miners not yet leveraging that as they traditionally (and rightly) do?
As we track each week, there are larger macro-fundamentals that have started to turn more positive for the gold mining sector. But this hopeful signaling could also be a picture of the final holdout bugs not yet giving up hope. This as earnings season approaches.
There’s either a final running of the bugs ahead or an impending fundamental turn for the better dead ahead.
Bottom Line
It’s going to be an interesting and potentially rewarding over next several weeks, into year-end. It could also a potentially damaging time if you are caught on the wrong side of things. Guessing is not a strategy. Neither is hope.
The signaling in stocks is that while the S&P 500 rotates it way out of harm’s way thus far, the broader market is in a significant corrective mode. The seasonal is positive on average, but until leaders like Semi and Tech can get up off the ground, SPX will also be vulnerable.
Gold is making a test of the July lows. Silver has breached its July low. The miners are curiously well above their July lows even as earnings season should theoretically show negative leverage to gold’s price relative to oil.
There are conflicts aplenty in this macro picture. I think that is at least in part a reflection of policymakers like Bessent and Warsh in the market, a chaotic and ill-advised war in the market, rotations under way in the broad markets and hope still alive in Goldbugville. Hope not being a strategy, it’s probably best to evaluate weekly as the process plays out all around.
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