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Gold: The answer lies in whatever Covid-narrative is discounted by the market.

Bijgewerkt op: apr 11


Please read the Disclaimer before reading this article.


Two weeks ago, just after the election, I noted that strictly speaking (when following my own investment process), it seemed to be time to step back into the gold market.

But…, I wrote that there was one big caveat: “However, since it all happened during election week, I’m ready for anything. I’ll be watching the price action like a hawk early next week.

If we see a retracement, former resistance should now act as support. If this is not the case, better watch out. If prices continue their march higher, this is also a clear sign that we should act. The price action in a lot of markets was very extreme last week. This can be the beginning of a new trend or it can all be an emotional move that will unwind quickly.”


One day after I published that article, Pfizer came out with its vaccine news. Both the stock market and real interest rates shot up and the gold price declined 100 dollars in one day. I was prepared to watch the price action like a hawk, but because of the news event, even a pigeon would have seen what was going on: gold didn’t even try to find support at its former resistance.


A few weeks earlier, I wrote that I was looking for one final move higher, after which we would see a much longer consolidation/correction, than we have seen over the past 2 years:

“Big picture, I think we will see one more strong move upwards in the gold price after which we probably won’t see a lot of progress for more than a year. Historically, this isn’t abnormal at all.

We will probably reach that significant peak somewhere in the first half of 2021. Gold will then likely consolidate for a long time after which it will go to much higher levels.

Another thing I’m carefully analyzing right now are interest rates. As most of you will know, gold is primarily driven by the trend in the US Dollar and (even more so) by the trend in real rates.

Having an idea what real rates will do is crucial in understanding the movements in the gold price. I’ll write on this topic in a future article.”


I already hinted at the fact that real interest rates were important in the analysis of why this would happen.


Two weeks ago, I made an analysis on US interest rates that would give me the confidence that if gold was going to rise from that point on, that there was a fundamental driver behind it.

Please note that I didn’t use this as a strong forecast of where interest rates were heading.

It only was useful to me because it showed me there was a potential driver for higher gold prices in the short term, as I wrote: “I bring this up because if gold is going to rise another few 100 dollars, I would like to know what is going to drive it.

If I decide to step back into the gold market, my analysis of interest rates will give me the confidence that there is a fundamental driver to drive the gold price higher.”


When the vaccine news came, interest rates in the US and Germany shot up together, and have been declining together as well since that sharp move upwards. Hereby, the correlation between the two is restored.


The big question now is what will real interest rates do going forward? The reason I said multiple weeks ago that after the final move higher I’m expecting, gold will have a long consolidation/correction, is partly because I think interest rates will rise somewhere in 2021.

I became bullish on government bonds (thinking interest rates will decline) at the end of 2018 (when a lot op people thought interest rates would only continue to rise).


Why am I so bearish on government bonds for the next few years?

First of all, the stimulus we have seen since the Covid-crisis on both the fiscal and monetary side, has been truly enormous in its magnitude.


Here is Bridgewater comparing the current policy response to that of the Great Financial Crisis and the Great Depression: “The policy response to the current crisis is unprecedented in its speed and magnitude. As a result, we have asset reflation in warp speed.

What took three years and seven months in the Great Depression took one year and six months in 2008, and only one month in the current crisis. In the Great Depression, it took three years and seven months from Black Thursday before President Roosevelt broke the peg to gold, allowing the Fed to print enough to stop the free fall in equities and the economy, and the reflation continued for four more years before the next downturn. In the Global Financial Crisis, the turn came with the start of QE in March 2009—a year and a half after stocks began to fall—and it wasn’t until a pause in QE2 that equities had another sell-off of more than -20%. This time, when the pandemic hit, the stimulus from the Fed and fiscal authorities was so swift and so massive that the equity downmarket lasted only a month, and stocks are now approaching their pre-crisis peaks once again.”

Source: Reflation in Warp Speed, Bridgewater


The following charts from Bridgewater show very clearly how enormous the policy response has been.

Notice the dates on the bottom of the charts. At the end of April 2020 (green line), we had already done as much monetary stimulus as we had done in the three years after the Global Financial Crisis.

Source: Reflation in Warp Speed, Bridgewater, Greg Jensen, Mark Dinner, Melissa Saphier, Riley Edmunds


On the fiscal side, the US has now already done more fiscal stimulus than we did in the 4 years after the Global Financial Crisis combined.

Source: Reflation in Warp Speed, Bridgewater, Greg Jensen, Mark Dinner, Melissa Saphier, Riley Edmunds


The global stimulus we are seeing is truly unprecedented and somewhere next year, this is going to start to show itself in the data, putting upward pressure on interest rates.


This isn’t just my opinion; the models are already showing it. Remember that I don’t like narratives. Some people think that the United States will become like Japan and interest will stay low forever and will even go negative. Unfortunately for them, all the models are showing the opposite.

Below is one model from Nordea that shows that the pressure on interest rates is getting very big.

I can show you 3 other models, from 3 different sources, that are all showing the same thing…

Source: Global fixed income: A perfect storm brewing?, Nordea, Mikael Sarwe


So, somewhere next year, the pressure on the bond market will become enormous and the fed will probably step in with some sort of yield curve control (just as the Japanese and Australians are already doing right now and the US did after World War II).


Fed chair Jerome Powell already said that the Fed is thinking about this (although according to them, they are still in a very early stage): “So it’s not a decision that we’ve made. The sense of it is that if the market, if rates were to move up a lot for whatever reason, and we wanted to keep them low to keep monetary policy accommodative, you might think about using it, not on the whole curve, but on some part of the curve. And it’s not a decision that we’ve made. It’s sort of an early stage thing we’re evaluating.”

Why is it important to know that real growth will come back sharply somewhere in 2021? Well, because it will have a profound impact on markets.

The dynamic of a severe growth slowdown or recession and the recovery afterwards is very important to understand.

Remember the sharp down move we saw in economic growth at the end of 2015-early 2016? (It is called the mini-recession by some observers.)

In the middle of 2016, some famous analysts were calling for a further deterioration in the economy and lower bond yields. The economic models were however showing that growth had bottomed and yields would start to rise again. So, both nominal and real interest rates bottomed in the middle of 2016 and started to rise, thereby putting huge pressure on the gold price as can be seen on the following chart.

(The black line are TIPS inverted, so when the black line is rising, this means that real interest rates are rising.)

Please note that this was not the consensus view at all in the middle of 2016!


So I want everyone to take into account that when real growth will come back, better be careful with your gold. I saw a lot of people who remained bullish gold in the middle of 2016 because they thought interest rates would stay low forever…

(As I wrote in a previous article, gold and interest rates rose together in the 1970s. This is a possible scenario that I’ll need to analyze more carefully.)


Let’s have a look at what happened after the Great Financial Crisis. Growth came back and nominal interest rates started to rise. This time, gold was able to rise as well because even though nominal interest rates increased, real rates decreased.


So somewhere next year, nominal interest rates will start to rise and this will probably have an impact on gold. As we saw in these two historical examples, the impact can be good or bad depending on what real interest rates will do.

So, will we have the same experience as in 2009-2011 or as in 2016?

Important to note is that in 2009, the 10-year real interest rate stood at 5% and declined into negative territory. Right now, we already are in negative territory…


Of course, the situation is now completely different. The dollar is starting a multi-year downward move, the Fed will stay accommodative and will try new policies, worldwide debt levels are much higher,…


So I don’t want you to think I’m bearish on gold big picture, I’m a huge bull for the coming years. I just want you to know that there will be a time to sell because it is not abnormal for gold to correct for more than a year during a bull market.

Most gold analysts on twitter didn’t warn you to sell in early August (which I did, see here) and they probably will not tell you to sell at the next peak. No, they have been incorrectly telling you to get back in for several months now…


Another interesting observation is that during 2005-2006, the gold price increased 55% when both nominal and real rates were rising. Even the dollar was firm during that period and only declined in the last few weeks of this monster move in gold.

I have no idea why gold rose during that period other than for the reason that the time was right.

This is important because we can do all the analysis we want on the dollar and real interest rates (the most important driver of gold historically), at the end of the day, gold is capable of ignoring it all and doing what it needs to do. Just something to keep in the back of your mind.


So, let’s go back to the short term picture. Will we see the final move down to the 1800 level?

Let’s quickly recapture the things I like about the current set-up:


-The correction has taken long enough in time (Remember the gold analysts that were calling a bottom 1 week after the top?).


-The weekly RSI is at a low enough level to support a strong rise in the gold price


-GDX and GDXJ have reached their targets.


-Sentiment has deteriorated sufficiently (using the Daily Sentiment Index)


Some new positive signs that I noticed these last two weeks is the fact that even sentiment on twitter among the gold analysts has come down sharply for the first time since early August. While I was one of the only (with about 5 other analysts I follow) that didn’t call a bottom and remained bearish during the whole correction, now the consensus seems to be that we will definitely visit the 1800 level…


Also interesting to note is that we saw one of the biggest outflows ever out of gold during this last week. For me, bearish sentiment is surely high enough to become bullish.

Source: Gold: Testing Patience But Toeing the Line (For Now), Knowledge Leaders Capital, Bryce Coward, CFA


On November 11th, I tweeted the following:

(If you want to see the accompanying charts, please visit my twitter account.)








As I wrote after the election, I don’t like it when gold moves sharply on a news event. A lot of the time, it is a fake move. When the Pfizer news came and gold quickly dropped, this gave me the opportunity to buy some mining shares at the exact levels I had identified in early August as my target. Since this was the first time there was a positive divergence since early August, I went out and bought half my intended position.


We saw a weak bounce in the gold price (and the mining shares) and as I warned about in my tweet, this positive divergence turned into an oversold bearish signal.

You can see on the following chart that historically, when the mining shares are this oversold, we see a quick, sharp bounce.

If we don’t get the bounce and gold and the mining shares continue their decline, I’ll stay with my position because long term, these are ideal levels to buy. If we get a quick bounce, chances are high I will sell with a small profit and will be looking to get back in when I see a new possible bottoming formation.


This last strategy plan (selling without a loss when we get a sharp bounce to buy back again later), is however under strong consideration to change…

Why do I write this? Simply because the short term trend in real interest rates is unclear to me.

The models show me that somewhere in 2021, interest rates will rise. These models are however not short term timing tools and who says that the rise in interest rates hasn’t already started? This would mean that the longer term peak in gold that I was expecting somewhere in the first half of 2021, already may have occurred…

(I know that interest rates have been slowly rising since early August but the question is if this is the move to >1% or that this move will only come somewhere in 2021 and we will first go down again.)

(Please also note that if August marked the bottom in interest rates, the move higher I’m expecting in gold is still valid because at some point, the Fed will probably need to step in to stop the rise.)


I’ll now do a type of analysis that I don’t like at all.

The following chart shows the relationship between temperatures and the severity of the Covid crisis. As you can see, lower temperatures will probably worsen the situation in the coming months with regards to the virus.

Source: @MacroOps


We had the spike in real interest rates on the Pfizer news but this doesn’t solve the Corona crisis in the short term. What if the market will readapt itself to the worsening situation and interest rates start to fall again? This will provide the fuel for the leg higher in gold and will be the final push lower in interest rates. Then next year, the enormous stimulus will come through, vaccines will get rolled out, and interest rates will rise, just as the models are predicting.

This is a very possible scenario but unfortunately, I don’t have a short-term model of interest rates that supports it. This is a narrative, a well thought out idea, but still a narrative (and as you know, I don’t base my investments on narratives). Therefore, I’m not able to say with conviction what will happen.

It will all depend on which narrative on the Corona crisis is currently discounted by the market. If the worsening situation is discounted by the market, then interest rates will continue to rise as the (longer-term) models predict.

On the other hand, if the Pfizer optimism is discounted by the market and reality will show that this optimism is too soon, then interest rates will make their final move lower and the big bottom in interest rates will be put in place somewhere next year.

I guess we’ll need some patience to find out…

(Please note that I won’t base my investment plan on this narrative, I’ll use my trading plan as discussed earlier.)

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