March 18, 2020
When stocks are plunging and the future is uncertain, money tends to plow into bonds (bonds higher, yields lower). We’re seeing the former, but not the latter.
Last week as stock were plunging, so were bonds. This sent yields higher, in the face of a recent surprise rate cut by the Fed.
With that, the Fed came back in Sunday night with a massive response, slashing rates to zero and starting a $700 billion bond buying program. And Powell warned that his desk at the Fed would “go in strong” on Monday buying Treasuries across the curve.
That kind of statement should spook any speculator out of the market immediately, and should be more than enough to normalize the market. It hasn’t.
With the fed funds rate at zero, the 10-year yield traded as high as 1.26%.
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This is clearly a battle ground for the Fed, to maintain stability in global markets. So far it hasn’t gone well. Last week, a few large hedge funds were said to be in forced liquidation. When this happens, they tend to sell what they can, not what they want to. In this case, they are purging what has been working: the long bond and long gold trade.
Which is also why, we have this chart in gold …
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As the world's central banks are printing money and governments are rolling out massive deficit spending programs, gold should be moving higher like a rocketship. Yet it's down 13% since last Monday.
Let's keep in mind that the Fed has the printing press, and won't lose the battle in the bond market. In the very near future, the Fed will probably have the 10-year yield where they want it (maybe at 30-40 basis points), and be in complete control of the yield curve. It may take that observation to turn around the price of gold. When it does, we could see gold much, much higher (maybe $2,500ish). For readers of Pro Perspectives: If for any reason you are not getting my emails (as from time to time, getting emails to inboxes can be challenging), you can always find my daily notes here.
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