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Gold's safe-haven bids return during stunning action in bonds

Commentaries & Views

With the Dow rising or falling in 1,000-point daily increments again this week, the Gold/Dow ratio is breaking out of a 2-year inverse head & shoulders bottoming pattern. This means that generalist investors are beginning to sell equities and parking some of the proceeds into the safe-haven metal. We are witnessing record-setting market plunges from all-time highs during a period of negative-yielding government bonds, as investors are terrified of a deflation scare due to the COVID-19 Virus.

Despite the gold price trading at 7-year highs, the mood at 2020’s Prospectors and Developers Association of Canada (PDAC) convention was very serene compared with previous functions. Handshakes were being discouraged, so many attendees decided to bump elbows creating uneasiness instead. There were also large signs posted throughout the convention floor blaring personal hygiene tips. 

Just a few weeks before attending, if you were to tell me that gold would be trading at $1650 during the conference, I would have expected to see much more excitement to say the least. But it was quite the contrary at the Metro Toronto Convention Centre this year and many junior firms decided not to attend just a few days before the conference began on Sunday, leaving a plethora of empty booths in the conference halls.

Meanwhile, gold has been on a tear since the COVID-19 outbreak, and as mentioned in this column last week, took a breather with long positions sold to possibly cover margin calls and losses booked elsewhere. But this week, investors have quickly returned to gold and its miners as a store of value after the Federal Reserve’s emergency rate cut sparked a collapse for the ages in 10-year Treasury yields.

The Federal Reserve held a rare emergency meeting on Tuesday to unleash $100 billion more of repo liquidity, together with 50bps of rate cuts due to virus fears. This was a panic driven move by the world’s largest central bank that has backed itself into a corner and had to act in response to the collapse in economic data for the 1st quarter.

But at the same time, rising rates in the real world due to perceived credit risks is forcing the Fed to become the permanent market-maker to maintain short-term rates at these levels via non-stop Repo Market injections. We have witnessed two days in a row where the bids for Repo have exceeded supply.

The steep 50bps rate-cut was an effort to protect U.S. economic growth from the impact of the coronavirus outbreak. This desperation move by the central bank, which pushed the Fed’s policy rate down to a range of 1% to 1.25%, marked the largest cut since the 2008 financial crisis. But the production lines had already been declining and global economies were in the process of slowing before the Black Swan event known as COVID-19 forced the Feds hand. 

Furthermore, speculation is mounting that the Bank of England will follow the Federal Reserve with an emergency interest-rate cut. The Group of Seven’s pledge to coordinate responses to the COVID-19 outbreak, followed by the Federal Reserve’s move, has also set off a flurry of activity from policy makers across Asia-Pacific.

In Friday’s wild rally in Asian hours, Treasury traders in the region pointed to a lack of liquidity as one factor which exacerbated the size of moves. Sharp gains in U.S. ultra-bond futures also caused circuit breakers to kick-in, briefly halting trade.

Moreover, after the 10-year Treasury note yield booked its eleventh straight session of declines yesterday, yields have continued down to just 0.737% this morning. The yield on the 2-year Treasury is now a full half-point lower than the federal-funds rate the Fed targets. And for the first time ever, the 30-year TIPs, a tool that is supposed to assist investors in beating inflation, is yielding a negative return.

This stunning action in bonds has the CPM FedWatch Tool already pricing in a 65% chance of a further 75bps rate-cut during the next FOMC meeting in 12 days that has been keeping gold well bid. With the world’s largest central bank already behind the market as traders gobble up government bonds, we may even see an unprecedented two inter-meeting rate cuts.

However, silver continues to trade as an industrial metal and has been lagging the gold price during the stock market sell-off. Last Friday, the gold/silver ratio spiked to 102-1, a level not seen since 1940. Although my contrarian nature is screaming for me to buy anything silver related here, the metal could make a new multi-century high before silver embarks on a major upward trend relative to gold. But if the stock market bubble were to burst, economic confidence would tank and investors will panic towards ‘liquidity’, which could send the ratio to all-time highs and push the silver price much lower.

Although COVID-19 will eventually go away, where the market goes until it does is anyone’s guess and leaves too many question marks for the near-term to attempt buying fishing lines in risky juniors just yet. Until we begin to see some normalcy return to the marketplace, it will be more important than ever to remain nimble and avoid complacency. 

There is an old saying on Wall Street that one should “sell down to the sleeping point” on bounces during panic-driven sell-offs in the marketplace. This means one should only assume the risk that can make you sleep comfortably at night, without excessive worry.

I strongly advise investors discover where their own personal sleeping point lies, then act accordingly to accumulate cash. Holding some physical gold until we see how this global equity panic plays out is not a bad idea either. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.  

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.