A handful of thoughtful investors in our exclusive Macro Research network have started asking me what I think about US Treasury Bonds working higher at the same time as Gold is raging higher. I think it boils down to one word - stagflation.
As the Burning Buck gets absolutely torched (down a big -1.4% today alone), the US Government is going to sponsor imported inflation in Q4 (when y/y deflation becomes y/y inflation). That’s why the Prices Paid component of the August ISM report was up +18% sequentially (month-over-month). That’s why Gold was up +4% last week. That’s why gold and other stable foreign currencies like the Euro are making new YTD highs relative to the US Dollar again today.
Understanding that the US Bond market smells stagnant growth AND that the US Federal Reserve is as politicized as it has ever been could be one and the same thing. There has never been a country that has sustainably attracted mass investment (foreign inflows) with ZERO as their base rate return AHEAD of accelerating Consumer and Producer Price readings. As a result, growth oriented risk capital is leaving America.
Don’t take my word for it. Look at the recent TIC Report (Treasury Capital Inflows). It’s getting flat out nasty. While the world’s central bankers may be buying non-growth oriented US Treasuries (supporting the Treasury market), they are nowhere to be found buying agency debt or anything American-risk for that matter. Instead, they are buying gold, copper, oil, foreign currencies – you name it. Anything other than the currency of a country who is about to enter the danger zone of economic stagflation.
Below, we have attached the metaphor for this foreign fund flow trade – the chart of NYMEX Gold. While we have it immediate term overbought north of $1009/oz, the long term setup here is very attractive. Any time we have our longest dated duration (the TAIL line = $889/oz) underpinning both the TREND ($945/oz) and TRADE ($953/oz) lines of price momentum, we call that a Bullish Formation.
Anytime a Bullish Formation is met with accelerating volume and accommodative volatility studies, we are paid to pay attention. Gold remains in a bull market. US centric stagflation remains the world’s rightly placed future concern.
Keith R. McCullough
Chief Executive Officer