Gold - Features, Factors & Forecasts

Unconventional Wisdom. Original Thinking.

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Sean Corrigan

Thoughts on GoldSean Corrigan




Sean Corrigan

Rationale




Sean Corrigan

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Non-PM Commodities/Gold (t+3) v Detrended Log Nominal UST10 yields, 6mma: Source, IMF, CRB, Bloomberg

IMF-AU (lhs)

UST10 Nom (rhs)

Sean Corrigan

Breakdown to peak

of 'Super-Cycle'

GFC/QE

discontinuity

In many ways, gold is more of an anti-commodity than a commodity proper in that it tends to respond well in those same periods of actual or feared stress - episodes of ‘Risk Off’ –in which other, more consumable commodities are doing badly.

There is much loose talk about it gaining ground when interest rates (whether nominal or real is not always clearly specified) are low, but since these have been on a downward trend for 35 years or more – a period whose first half saw major declines in the price of gold - clearly the truth is somewhat more nuanced.

The chart here shows that the other commodities/gold ratio declines not so much when Treasury yields fall as when they fall more rapidly than is normal (and vice-versa).Given that USTs are the go-to asset in episodes of flight-to-quality, this may of course be a further reflection of gold’s ‘insurance’ policy properties.

NB this suggests that gold greatly overshot in the recent move up.




Sean Corrigan

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Gold v TARGET2: Source - BUBA, Bloomberg

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Sean Corrigan

In a similar vein, up until the beginning of last year, gold broadly mirrored the barometer of dysfunction in the Eurozone which is the TARGET2 outstanding balance (shown here, for simplicity, in terms of its most important single component, the BuBa credit balance, with and without the build up in the SNB’s largely Euro-sourced forex hoard).

‘Whatever it takes’ may have taken the heat out of this for the better part of two years, but since then all Draghi’s interventionist barrage has not prevented a renewed rise in the total –perhaps because of bail-in worries relating to Portugal, Italy, etc.

Having diverged from this trend for most of last year, gold may now be playing catch-up.




Sean Corrigan

Here again, we see the Risk-Off nature of the beast, gold rallying vis-à-vis base metals when credit spreads and CDS measures widen, volsspike (not shown here), and that eternal Asian storm petrel, the Korean won, sells off hard.

Accordingly, with the partial subsidence of the earlier panic in the past few days, gold has unsurprisingly lost some of its recent lustre in both absolute and relative terms.

The main caveat to this is that NIRP means that, yes, it really IS different this time. A dangerous basis on which to act, perhaps, but it is also hard to deny that at least some of the renewed enthusiasm for gold comes from growing expectations of a sizeable Chinese reflation attempt which will possibly be combined with a larger yuan devaluation and which will therefore entrain a flight to hard assets. Adding to this is the perception that the War on Cash will drive people back, fautede mieux, to a metal for which the opportunity cost of possession may turn out to be uniquely sub-zero.




Sean Corrigan

History




Sean Corrigan

Turning to historical comparisons, we can see that, at its 2011/12 peak, gold had become inordinately expensive and so had perhaps made a severe correction almost inevitable.

The question now poses itself: is the late rally any more than an interim consolidation in a much deeper, more prolonged decline of the kind endured in the two decades after the last peak?




Sean Corrigan

Once again, in terms of the hours of work which the purchase of an ounce of gold requires, it had become as expensive as anything seen since the outbreak of WWII.

Where will the overall rotation lower come to rest in this floating-rate era distribution? At levels which prevailed around the time of the LEH Crisis?




Sean Corrigan

A wider look at gold’s relation to general commodity prices, here via the BLS producer price index for industrial commodities




Sean Corrigan

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Gold v IMF Commodities - Total & Industrial Subset: Source - IMF, CRB, Bloomberg

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Sean Corrigan

This time using the IMF basket as a comparison, we can see that the relative advance mapped-out since the oil price decline first started has been similar in extent and duration to that brought about by the onset of the GFC itself.

So, can we really expect to push on much further without at least first spending a period laying out a distributional range? Perhaps only if a further outbreak of financial insecurity takes place.




Sean Corrigan

Putting some detail on the previous graph, the move versus copper shows signs of laying down a classic, medium-term profile. Will it therefore mean/mid revert?




Sean Corrigan

Having probed outside a four-decade distribution – and having completed a nice swing pattern of one-way extension-then-oscillation-then one-way culmination, as it did – a break back below the highs of 1979, 1986 & 1988 would argue for a much more significant reversal




Sean Corrigan

Indeed, against crude oil, such a rejection of those new highs has already taken place.




Sean Corrigan

One of the few comparisons in which it has not this time reached extremes, but rather has returned the ratio to the (decidedly off-centre) high-volume area of the last 20 years’ distribution




Sean Corrigan

For those who like that sort of thing, yes, there is plenty of money in the world in relation to gold, but it is very hard to read anything systematic – and hence – predictive – into such a chart.

Money has a much stronger relation with revenues and with the prices of the tradeable goods which their generation entails than it does with the price of gold, per se.




Sean Corrigan

Diggers v the Dug




Sean Corrigan

Looking at the other principal means of exposure to the gold price, after its break-out, the metal is now testing support against the Amex Gold Bugs index




Sean Corrigan

And versus the PHX version, where that rejection of the high is even clearer, we could see a 50% retracement of the move




Sean Corrigan

Positioning




Sean Corrigan

As can be seen her from risk-reversals, market sentiment & positioning have swung decidedly bullish since the end of January




Sean Corrigan

Perhaps more clearly seen here with a s/t measure. Most bullish since LEH




Sean CorriganNot much short interest in the ETF




Sean Corrigan

Shares outstanding have jumped by a quarter in 10 weeks, again a post-LEH high rate of increase




Sean Corrigan

From near flat at Xmas, both gross & net spec longs on Comex are now at/near multi-year highs, right in the middle of the prior bull-market range.

All the positioning data shows that a good number of players are already on board this move




Sean Corrigan

Technicals




Sean Corrigan

Technically, gold has retraced 50% of the move from June 2013’s failed rebound and is left stuck between the competing high-volume ‘nodes’ in the distribution.

It needs to clear $1300 to signal a major bullish move or fall back below $1200 to restart the overall unwind of the 2005/11 run-up




Sean Corrigan

Abstracting from changes in the US dollar’s value, things are more unequivocally positive in that we have left behind the 2013/15 balance area and are once more bumping against the lower bound of 2011/13’s record-setting sub-range.

The potential buyer is, however, parting with his cash (negative-yielding or not) at all but unprecedented levels, so no downside stubbornness should be indulged in and not too much toleration of any loss of momentum would seem to be the watchwords.

Active risk management in such a circumstance is something my colleagues at Hinde Capital would be happy to discuss with you



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Sean Corrigan

Gold - Features, Factors & Forecasts

Economy & Finance

Transcript of Gold - Features, Factors & Forecasts