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What happens to gold next, and where are yields headed? Peter Hug

Kitco News

Rising nominal yield seems to be the theme of the week as a 10 year Rose to now 1.56. Up from yesterday, the gold price has fallen down below $1,700 today as a briefly shopped back up above that level. Last night, Peter hug, global trading director of Keiko metals joins us this morning to dissect market action, Peter, welcome back.

Good to be here, David. Peter, uh, Gold's down even from last week, we spoke last week about your critical support levels. It's uh, has it, has it breached those levels for you, Peter, uh, technical basis? Yeah, we were looking at, uh, uh, at the 1750 level and then 1725, uh, and it. Did relatively well on a close basis to hold those levels until about, uh, mid, uh, or to late, uh, Wednesday morning.

And then it cracked through those levels and, uh, and, uh, started to flirt around the $1,700, uh, figure number, uh, overnight. Uh, we saw it as low as 1788, uh, which, uh, if you trade, uh, from an Elliot wave perspective, It's about a 62 and a half percent correction from the peak. Uh, so I bounced there, so I would expect some technical support in around the, uh, 1685, 87 level.

Uh, certainly I don't think that's going to breach today. Um, and, uh, possibly, uh, seeing goal by the end of the day, closing in the high sixteens, if not low 1700. Okay. So let's assume this relationship with gold and the yield hold. Now, where do you see yields headed from here? Are we, are we capped at 1.56 or can we go even higher?

No, I think, uh, once you got through 1.5, I think there's some room to go higher. Uh, I, I'm actually quite surprised that the not sort of the trajectory of the move, but more the, the speed of the move. Um, you know, Powell came out yesterday. He seemed, uh, pretty nonchalant, uh, with, uh, you know, 10 and 30 years, uh, reaching, uh, highs that we haven't seen pre COVID.

Uh, and was kind of a benign on his inflation outlook as well. So it almost sounded like he didn't want to give the markets, uh, eh, you know, anything to deal with. Uh, and, uh, by, by being as benign as he was yesterday, it, uh, affected the stock market and the commodity markets, uh, Because he gave the impression he doesn't have a problem with the, with the 10 year and 30 year, uh, uh, yields rising.

Now I think his tune is going to change, uh, you know, at 1.5, 1.6, it's basically where it was just pre COVID and be like, it looks like we're going to start opening the economies in certain States. Uh, but if it gets North of one 75, uh, uh, I think she's going to change his tune and he may. Uh, he may create, uh, something within, uh, within the Fed's toolbox that to try to cap those rates.

I mean, the last thing he needs right now is the 10 30 year to be North of 2%. Uh, it just play well for an economic recovery. That, in my opinion, even though we open up, it's still going to be somewhat anemic for, uh, for the foreseeable future. Okay. Uh, I've heard that, I've heard that theory before that the fed should intervene.

Should raise go higher. Now I'm curious. As to, as to why that is, because if you take a look at the longer term horizon here, 2% on the 30 year, historically is not even very high. If you're talking about absolute levels, why should people be concerned about, uh, about, uh, bond yields at these levels right now, again, in the context of a normal working economy, uh, there should be no concern.

Uh, again, it's, it's. We're still not out of the woods yet. Okay. And you know, Honami needs all the help that you get, you know, uh, I mean, when you look at it, you, when you look at where the gold prices right now at 1690, uh, you know, prior to March of last year, uh, gold was about 1650. It then dropped, uh, when the stock market took a hit on the, on the first closings of the economy.

And then we know what happened after that at rallying to new highs, but you've got gold trading probably would in $75 of world was pre COVID last year. And, uh, there's no reason for gold to be where it is right now, or to sustain this level when you've got an additional four to $5 trillion that has been pumped into this market, uh, just in the us alone.

So. Somewhere around somewhere along the road, this is going to turn and it's going to turn pretty aggressively. Now, is there more to the downside again, I'd like to see that 1685, 87 level hold from a technical perspective. So we don't get more onboarding from technical traders to the downside, but you know, maybe there's another 50, 75 bucks emit to the downside.

But, uh, uh, I, I, I don't think there's much more in the gold market, uh, on the downside. Given what we've seen, uh, from, from the stimulus that's in the global economy. Okay. I, uh, I've explored this issue with several guests. I'd like to get your take. What is the relationship between commodities and yields?

We know that there is a relationship. We know that there is an inverse correlation as we're observing now, but why is, does that correlation? Hold is my, is my, is my question. Well, commodities are priced in us dollars. So it's not so much the needle that affects the value of commodities. It does. To some extent and I'll get to that in a minute, but what affects the movement in commodities is really the value of the dollar because commodities are priced in dollar terms.

So if you had yields rising in the us, but not rising in Europe or in the far East, then the yield differentials between the two currencies creates. Capital movement in the foreign exchange market, which is a market that is 20 times the size of the, of the metals markets. Uh, there's some eight to $10 trillion worth of Forex traded a day, uh, globally.

So when you've got German, but yields that zero. Uh, and you yields generally at zero Japanese yields at zero. And you've got us yields at one and a half on the 10 year. And, uh, you know, North of 2% on the 30 year, uh, you're going to get capital movement into that currency. So what happens when you get higher?

You know, if it's not. Higher yield momentum across the, uh, across the spectrum of all the currencies. It's just in one currency, you'll get capital inflows into that currency, which strengthens the currency. Now in this context, it's the U S dollar commodities are priced in us dollars as the dollar gets stronger, commodities get weaker.

Uh, the second part of the equation is, uh, if you have low interest rates, It's easier to carry commodities. Commodities are non-interest bearing assets. So low interest rates generates inventory builds in the commodity space because of low capital costs. So if you raise that capital cost by increasing the cost of capital, um, uh, corporations and industrial users will tend to lighten up on the rim inventory carry.

Uh, so the demand slackens off and then you get, uh, you get some weakness in the commodity space, uh, because of higher interest rates, uh, based on period costs. Uh, you spoke to me last week about the importance of the Canadian dollar, the loony. So suppose the interest rate differential between the U S dollar between the U S and Canada rises.

So we have higher yields in the U S relative to Canada. Shouldn't the USD rise in proportion to the CAD. And if so, what will happen to commodities? It is, I mean, what, what you've been seeing, uh, the strength of the Canadian dollar over the past year has basically been strictly a commodities value play again.

When you say commodities, you can't use the word gold. I mean, copper aluminum nickel. I mean, all of these are at multi-year highs and Canada is a resource country. Lumber is, is, is gone through the roof. So, you know, in the context of a commodity upcycle, which we've been seeing for the past year, a year and a half, That's beneficial, uh, for, uh, resource currencies.

I E the Canadian dollar. So it's been strengthening the, the weakness of the Canadian dollar, everything else being equal of commodity demand, sort of leveled off and prices leveled off a bender would be capital flows between Canada and the U S I mean, the Canadian dollar was trading in my terms at one 25.

To the us dollar yesterday and this morning it was at one 27. So it gave up 2% just on this yield bump in the ten-year overnight. So there is some sensitivity on the Canadian dollar revealed relative to the U S yields. Uh, but it's more the commodity play and the general global commodity play take gold out of this equation for now.

Uh, it has been up and, you know, silver. Uh, you would argue, uh, you know, gold is at $1,690 as we speak 95 right now. Yes. Last time gold was here. Silver was trading at $16 and, you know, silver still at 25. And, uh, you know, goes back to where it was almost pre COVID. So you can see that the industrial metals are still holding up, uh, in the context of, uh, of what's happening to gold.

You mentioned for the Canadian dollar. Okay. You mentioned yield and other countries. Now I'm just getting, I'm just curious as to why the, uh, other countries have well Germany or I'm looking at a 10 years actually negative negative 0.3%. The UK is at 0.75. Why aren't their yields rising at the same pace as the U S yields?

Uh, because I don't think that their economic recovery, uh, is, uh, As far as far as law apart, as far along as, you know, let me use this word, the perception of where the us economy is. Okay. With the rate of vaccines going, uh, out in the us, uh, it appears that we are well ahead of the world. Uh, in, in, in the speed of inoculations and the opening up of the U S economy and the pent up demand with the four to four to $5 trillion that's been put in here, uh, is exasperating the perception.

That the U S economy is going to recover more quickly than the European economies. Once a year, a P economy start to gain some traction, you'll see yields move up there and then the yields will narrow and that'll stop any strength of the dollar. Possibly start to weaken the dollar. All right. Let me try to put everything we've discussed today, uh, into a one thesis here.

And let me know if you agree with disagree with this point of view. So yeah. With yields strengthening in the U S based on everything you just said, could we possibly see the USD strengthening into the next six months? And that could put more pressure on gold in the medium term? Uh, it's possible, but I don't think so.

I, I think the dollar trend is still a lower, um, and, uh, you know, again, just, just take it in context. I mean the 10 year yield, uh, was about one point. One five, maybe 1.2. If we go out on a limit at the beginning of this year, you know, it's gone up in percentage terms that, you know, it's at one 60, so I'm percentage terms, the yield's gone up almost 20%.

Uh, whereas the European yields have not. And in that context, the Euro from where it started the year, it's up 200 bips, uh, roughly 2%. So you're seeing short term dollar weakness, but I would have expected to see much I'm sorry, dollar strength, but I would have expected to see much more dollar strength given the yield differential between the us and the EU.

So that indicates to me there's still underlying weakness somewhere in the us dollar. And it's just a matter of time before that stabilizes and Belle restarts this downtrend again. What what's keeping that a key weakness, uh, in the, in the USD and Peter, is it, is it a, is a stimulus or is it just a, where is it just perception of USO the economy here?

Uh, help me understand this. Well, I think it's a concern, uh, you know, when you, when you pump $5 trillion into a market, I mean, who's going to pay this bill and, uh, you know, this is all borrowed money. That's out in the economy right now. And if you'll go higher, Uh, the federal debt is the 5 trillion we've just added to it is going to balloon because interest cap, uh, interest cost on that debt is absolutely nobody's interest, especially the central banks, uh, in us to have interest rates rise.

And then you're going to have an issue where you're paying off, uh, you you're paying interest on, on this, uh, this liquidity that's been put in the market for the last year and change. At not 1% or at a half a percent, uh, but at 2% or two and a half percent, uh, now we're not, we're talking some serious issues with the, uh, with the capitalization of the debt, which is going to add to our debt.

It's going to reduce our GDP. Uh, and that's going to be negative for the dollar. So it's a tiny cycle here, but. Globally. You look at the U S with the amount of money they've spent. And now they're going to have to find refinance this debt at higher rates. I mean, it's, it's a really bleak scenario. If you look forward, uh, less this economy comes back absolutely full of guns, and they can make some of it up with, uh, with new tax revenues.

But again, I think that's going to be a, a process. It's not something where we turn the switch on and all of a sudden this money comes back in. Okay. Great. So I guess long-term, you're still constructive on gold. I, I know that from speaking with you short term, I'm speaking to some traders who are positioned on the short side.

Should we say, I don't know if you agree with them? Uh, yeah. I mean, a higher yield like that. Uh, again, uh, if, if I'm talking to a trader as opposed to an investor yeah. Uh, You know, traders trade on, uh, a number of things generally. I mean, I mean, I know of one trader that takes positions has no, uh, no concerns whatsoever about fundamental use, but, uh, I'm the exact opposite.

I think fundamental news generates the move, which creates the break either through resistance or support, which then triggers a trading signal. That you can trade on. So if you trade again, uh, you know, 17, 50 should have held it didn't once it gets through there, uh, you can take a short trade position cover at 1725, which is next support.

If it gets through 1725, you can short again and then cover. But for so many, you just say I'm too short, I'm not covering, um, yeah, I mean, one day they're going to wake up and Gold's going to be up a hundred bucks. Uh, and, uh, Yeah. So, I mean, I, I came to trade. If I'm born to be trading the market, I, I tend to trade with very tight parameters, uh, with very tight stop losses.

And if I'm right, I ride the profit and if I'm wrong, I, uh, get out and hopefully with, uh, uh, with not too much skin left on the table. Peter we'll have to do a trading masterclass with you. One of these days, just an entire segment on that in LA on that I think it's called the education. It's called the dart board and you just throw it.

And on one side it says, sell like guarantee. He'll be right. 50% of the time they had a monkey do that once, uh, throw darts at a board and they picked whatever stocks that the darts landed on. And that, that board outperformed a lot of money managers. They serve it that year. There was back in. That was back a few years, 10, 20 years ago.

But I remember that, but yeah, again, trading is a people call it an art. Uh, it's it's a gut feel and, uh, Uh, I mean the main thing, if you're going to trade a market, any market you trade is a, you just have to have the discipline to put a stop-loss in and you have to have the discipline. This is the hardest to write your profits and just raise your stops.

Most people, when they're in a profit position, they just take it. And when they're in a loss position, uh, they hope that it's going to turn around and they accentuate their loss and they take their profits too early. Uh, it's a discipline that's, uh, needs to be learned, uh, and usually learn it the hard way, uh, by getting clipped, uh, uh, but that's a discipline that if you're going to be a trader and be successful in the long run, you have to, uh, understand and be able to execute.

Right. Fantastic. Thank you very much, Peter. Have a good weekend. Thank you. Same to you. Bye-bye and thank you for watching kiszko news. Stay tuned for more and don't forget to subscribe. .

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