Market Musings 030324: A Weaker US Dollar To Ignite Gold, Stocks?

3rd Mar by Edmund Shing

15 comments 1391 reads

Market Musings 030324: a weaker US dollar to ignite Gold, stocks?

Podcast - Today is not like the 2000 dot com bubble

Edmund Shing explains the similarities and differences between today's
AI-fuelled stock market rally and the last tech-based dot com bubble
(and bust) of the Year 2000.

Report - Our answers to four recent client questions

1. What are the risks related to the various elections to be held in 2024?

This year is a packed year for elections throughout the globe. The most significant one for the financial markets is the American election.
In the US, there is a relatively high probability that control of the two Houses of Congress will be split between the Democrats and the Republicans.
This will limit the new President’s room for manoeuvre.

2. What are the risks of another sovereign debt crisis in the eurozone?

Eurozone debt looks sustainable, with the average real interest rate on eurozone debt lower than the eurozone’s real potential growth.
Solidarity between eurozone member states has increased.
The ESM and ECB have powerful tools to deal with a potential crisis.

3. What factors could challenge your scenario of lower inflation and lower interest rates?

The main upside risk to inflation is wage growth. Leading indicators for labour demand suggest a significant decline that should limit future wage increases.
The US presidential election is an additional risk for 2025.

4. Do you see more risks or more opportunities with regards to China?

Many investors and asset managers remain severely under-allocated to China. Short covering and hence a decent bear rally can be expected.
The property sector needs to show signs of stabilisation before the economy can be on a true path to recovery.
There is hope that the monetary authorities can (and will) do more.
In the near to medium term, more pro-growth policies can be expected. All eyes will be on the upcoming National People’s Congress on 5 March,
which may provide further indications of the economy’s direction.

US economy finally shows some signs of slowing

Weaker U.S. economic data and comments from Federal Reserve officials have bolstered expectations for interest rate cuts later this year, after a period where surprisingly resilient US activity had obliged interest rate market to trim their 2024 US rate cut expectations.

The Institute for Supply Management (ISM) said its manufacturing PMI fell to 47.8 last month…

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Alphaflight

3rd Mar

Gold is nicely following M2 USD Money Supply:

Source

aflash

4th Mar

Gold bullion in yellow (GLD), up 240% since jan 2006.

Gold miners (GDX) in green, down 19% since 2006... underperforming even the dollar index.

DXY U.S.Dollar index candlechart in middle up 14% since 2006.

If you right click on chart to open in another window, you get an expanded version.

TradingView is a dream come true.

doctor dave

Great arricle. It's odd that the Gold Miners are lagging. At least to me it is. You would expect them to be a geared play that would forge ahead strongly with an increase it gold price. Wouldn't you?

They do not always lag.

Chart below shows miners (GDX) (in green) got ahead of the gold price most of the time between April 2020 and April 2022.

Then very briefly in April 2023.

There's a seasonal theory too, anyone remember how it goes?

chelsea

is there an
EFT for gold bullion as opposed to gold shares?

Yes. The only gold ETF properly backed by physical gold is the Sprott product:

Sprott Physical Gold Trust (PCQ:PHYS)

or the UK listing:

Sprott Physical Gold Trust (LON:0MK3)

Thanks

The Phoenix

Hi I thought I Shares physical gold etc was also backed by bullion Alphaflight ?

5th Mar

I believe that the iShares product does not allow for physical gold redemption. Whereas the Sprott product does allow for physical gold redemption.

Spot Gold Takes Out Record High

"Extending their run of the last few days, spot gold prices just exceeded their all-time highs, topping $2140 for the first time in history..."

BnB

Beware, says my bank. The gold price is rising on bitcoin and not much else. Barring a recession and heavy monetary stimulus, gold is on a weak footing. Short term technicals are good for more gains but it's a short term trade.

"Beware, says my bank. "

mmm. Perhaps you should refer your bank to the below chart. Ask them if they can spot the pattern and where they think things are invariably heading:

"The gold price is rising on bitcoin and not much else"

I don't think it has anything to do with Bitcoin. Bitcoin is merely an electronic "coin" in a virtual wallet backed by nothing but a picture of a gold coin with an embossed letter B.

The rest of the world's central banks (ex-G7 countries) are buying physical gold hand over fist right now. The physical gold is leaving the west and heading east. Central banks are not buying Bitcoin. Have a look at how much Gold the Chinese central bank bought during the last 6 months for example.

The FED will continue to print currency units out of thin air. Look at the long end of the yield curve, it looks to me like they've lost control of it now. TLT is a useful proxy: iShares 20 Year Treasury Bond ETF (NMQ:TLT)

The G7 are losing their war with Russia. The probability of things escalating further is a non trivial number.

Oh and that situation in the middle east...guess where ~40% of oil production comes from.

That chart only tells us that gold is a hedge against inflation. Try comparing gold against other real assets, as represented perhaps by the S&P500.

7th Mar

"Try comparing gold against other real assets, as represented perhaps by the S&P500."

Equities are paper promises I'm afraid. Read the infamous Great Taking by David Rogers Webb. Moreover, gold should be inversely correlated to S&P 500 equities over time, government bonds used behave this way but now they do not - something has changed recently. Consequently, the generic 60-40 equity-bond portfolio no longer appears to work. I and others would argue that every portfolio should have a >10% allocation to physical gold.

Central banks acquire gold as it is a hard asset. Gold is not part of the financialized system when owned outright. It has no counter party risk.

IncredibleMosesLeroy

Historically, bonds do not act as an inverse correlator to stocks when inflation is above 4-5%. Julien Brigden has done some interesting work on it.

Market Musings 030324: a weaker US dollar to ignite Gold, stocks?