What’s Behind the Gold Rally?

Short covering in the bond market.

Don’t believe it?  Check out the chart below.

Gold is up 7.7 percent since the December 15 low the same day the 10-year Treasury yield peaked at 2.60 percent.

Why are Treasuries rallying?   The massive short position in bonds may be spooked that the Trump agenda is going to take longer than expected to be passed and implemented.

The bond market is wrestling with the Trump trade — and could continue to do so until the incoming administration and Congress can provide more details about their programs — particularly tax reform.

Buyers have been piling into Treasurys, sending prices higher and yields lower against a wall of uncertainty. At the same time, there is a giant short position, which can also help send yields lower as investors cover.  – CNBC

Or it could be what seems to be a destabilization of U.S. foreign relations by some of the recent tweets and comments by the incoming President (see here and here and here).

Gold is a hard trade and as we stated in a  post a long-time back the drivers of gold are numerous and can change without notice:

Gold is a weird cat with multiple personalities and more than nine lives.  The yellow metal is up almost $100 since last Friday’s weak U.S. employment report.

At any given time period  gold will assume any one of its multiple personalities based on a fundamental story and trade as:  1) a safe haven;  2) an inflation hedge;  3)  a commodity; 4)  a store of value against central bank balance sheet expansion;  5)  an alternative currency;  6)  central bank reserve currency;  7)  a diversification asset;  8)  an Armageddon hedge;  and/or 9) all of the above. 

Nevertheless, we expect the gold price to move inversely with U.S. interest rates and believe the U.S. bond market is in a bear market.  Though given the large bond short position, we wouldn’t be surprised if it continues to rally a bit more.   That should help gold in the short term.

We’ve been totally wrong on gold recently and thought the price could see triple digits by the inauguration.   In the words of the President-elect:  Wrong!

Keeping it on a tight leash.

Now, you decide.

bond-gold_barchart_jan17

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