Gold vs Treasuries
Gold's rising. Bonds are breaking. And a generational tide may be turning. What happens when commodities finally take the lead? Find out inside…
The pure inflation trade…long gold and short US treasuries (TLT) (the relative performance of gold and iShares 20+ Year Treasury Bond ETF) is telling us something in no uncertain terms:
Even just looking at TLT, that is a rather precarious (bearish) looking chart!
Here is the FTSE World Government Bond Index (index of bond prices rather than yields).
We think that big damage was done in 2021 and 2022. If that was just a correction in an ongoing long-term bull market, then we should have seen new highs or near new highs by now.
Watch closely the behavior of 10-year yields. Specifically, watch 5% on the US 10-year yield. Above that level and world bond yields are going way higher.
We think this will happen, it is just a question of when, not if.
The US 30-year yield is already hinting at the direction of the US 10-year yield… and it’s not down.
Here is a thought… What if we looked at the behavior of the US 30-year yield (white line) and the ratio of commodities and the S&P 500 (yellow line)?
From 1980 until 2020, yields went down in an almost linear fashion, and apart for a few years from 2000 to 2005, commodities underperformed the S&P 500, also in a somewhat linear fashion.
Although the time frame isn’t as long, the S&P 500 has underperformed the Nasdaq (as a proxy for value vs growth) in an almost linear fashion (except for the TMT implosion from 2000 to 2003).
Was there a relationship here? In other words, is there a cause/effect of lowering bond yields (cost of capital) underperformance of commodities/commodity related stocks and outperformance of tech (growth) stocks?
Let’s reframe it: what if bond yields had never kept going down after the GFC? Would we have seen such underperformance by commodities and outperformance of tech?
We suspect that if the gold/TLT ratio continues to climb and bond yields continue to rise, then it is only a matter of time (sooner rather than later) before commodities start to outperform.
Given the length of time that they have underperformed (a generation or so), the outperformance is likely to surprise everyone in terms of duration and magnitude.
🔴 Geopolitical capital is fleeing, oil may be mispriced, and platinum’s plotting a comeback...but wait till you see what’s quietly booming in Greece… Ready to connect the dots?