Thursday, October 6, 2016

Metal and US Treasuries Two Weeks After $45 Gold Hit

There had been 14 sessions in the last 5 years, where gold (nearest to expiry future) has fallen $45 or more from open to close.  That accounts for less than 1% of all trade.  Tuesday, when news that ECB officials had found a consensus in plans for liquidating its securities portfolio (‘Tapering’), gold fell again by more than $45 from its slightly higher opening level.  Gold is still higher in on the year (19%), but is already 8% or roughly $120 below the July high.  Below, I will take a quick look at what has happened over the last 5 years when gold similarly fell.  

2 Weeks After $45 Gold Hit
UST 10yr Yield
Total Observations =14

Number of Observations Higher
Number of Observations Lower
Maximum Observation
Minimum Observation

We will remember that both Treasury yields and Gold prices have been generally falling over the last 5 years, so it is somewhat interesting that the average yield change on similar or stronger gold price declines has been that two weeks later, 10 year Treasury yields have on average been 6 basis points higher. 

There is good reason to believe that weak shorts remain in gold positions.  We know that long gold positions have been a very profitable strategy for hedge funds this year and that most funds are desperate for winning trades to repair very poor performance over the last two years.  So, with CFTC data indicating that hf’s are still net long 311,000 (futures and options), near the 350,000 record net long reached in June, it is easy enough to see the prospects for a more substantial gold price decline from here. 

To the extent these weaker gold prices reflect a ‘new regime’ for central banks as the reduced prospects for central bank balance sheet additions and low or negative policy rates may be fleeting, we could look for an equally significant adjustment in global sovereign yields.     


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