The rally in Gold continued today, with the precious metal up over 1.8% today in dollars, standing at $1,936…
This marks a significant melt-up in gold, which is up almost 9% over the past month…
and over 30% since its lows in Mid March.
This is an all-time record for gold in absolute terms…
…although in inflation-adjusted terms, gold is nowhere close to where it was during the 1980.
That rally of 1980 occurred as real yields hit an all time low, meaning that inflation was not just devouring all interest payments on Treasurys, but was taking a bite out of the principal as well.
In her Expert View, “Macro Maelstrom,” Lyn Alden discusses why gold performs so well when real yields are low.
Lyn also looks at M2 per capita as a relevant metric, since investors flock to gold as a safe haven as the money supply expands.
So with negative real yields, and the Fed committed to expanding M2 for at least the next year, there is no doubt an exciting macro picture for gold.
But there are also some flow dynamics that are flashing even more bullish signals.
Open interest in futures isn’t as high as it’s been during other rallies, indicating that it isn’t speculation in the futures markets that’s driving gold sky-high.
No. There’s actually a tremendous demand for physical gold, from family offices to hedge funds, to retail investors,
to ETFs like GLD that have seen massive inflows and have to buy physical to balance their net asset value (NAV).
And then look at this chart of how many futures contracts are being converted into physical deliveries, rather than being rolled over or settled in cash. It’s a record high.
So if retail and institutional are going long, who’s on the other side of the trade? It’s the swap dealers, the so called “bullion banks” who borrow gold from central banks and then sell it out on the futures market. They have a net short position totaling over $39 billion, the highest it’s ever been.
They’ve been betting on the gold price to stabilize, but with every attempt to put a lid on price appreciation, they create rising open interest in the futures market.
So with gold you not only have an interesting macro backdrop. The plumbing of the gold market indicates there could be a genuine run on bullion if all of these bullion banks have to cover their short position at the same time.
Should be an interesting few weeks ahead for the “pet rock”!
