Recap 2015-01-14: View on Gold, Gundlach’s Charts


OK, first the retail sales print today is BS. Oil prices fell by 20% in Dec… and core real retail sales dropped by the most in over a year? Not likely. Note that we saw an unusually weak prints for Dec 2011 and Jan 2014 as well, only to be followed by a snapback:

There was a fair bit of commentary over the sharp drop in copper. This is probably not a big surprise to most folks. But one reason that has been getting attention is the drop in input costs. The depreciation in non-USD currencies lowers labor costs, while the decline in both food and oil prices also means lower raw material costs. And that’s all before any adjustments are made for weaker Chinese demand. The net effect, not surprisingly, is a decline across the copper term structure.

What’s interesting is that these reasons applies to all metals, includes precious ones. In particular, few folks seem to be making the same argument for gold and silver prices. Sure, their investment properties mean that prices are less tied to supply/demand balance than the industrial metals. But it would be pretty silly to argue that spot gold prices have no connection with the marginal cost of production. In fact, gold miners equity prices have already started to pick up on the expectation that they will be able to take advantage of lower costs.

In addition, it’s worth noting the reasons why people buy gold, and where those trends are headed. The two more reasonable reasons I’ve heard are as a hedge against inflation and as a hedge against reckless government spending. In both cases, the implication is that gold is preferable over fiat currency because the fiat currency will be debased. Well, both of those reasons certainly no longer apply. Not only will inflation be negative by mid year, but the federal government’s fiscal health has improved sharply as well, given that the U.S. Reported Smallest Budget Deficit since 2007 recently. And with respect to currency debasement risks… in case you didn’t notice, the US dollar has been far and away the best performing DM currency over the past year!

Finally, note that over the past decade or so, gold has actually lead movements in real interest rates:

This is interesting because since the inception of the TIPS market, real yields have increased each time the Fed hiked. Now, obviously it’s anyone’s guess whether the Fed hikes this year. But given when they do, the contango in the Gold term structure will steepen, making the cost of carry more negative.

In aggregate, I think the backdrop strongly points toward a continuation of the secular bear market in gold. Not only have productions costs fallen sharply, but the investment reasons for owning it has weakened as well.

Separately, Gundlach’s webcast yesterday got a fair bit of attention. He has a good track record and has made a lot of great calls over the years. But I do think that a few of his charts and the implications should be reassessed.

First, the chart below noting the equities streak was quite popular. But I think we should put less weight on it.

The main reason is that the duration of equity bull markets tend to track the duration of the business cycles. As we know, the duration of US business cycles has steadily lengthened in the past few decades. As a result, so have equity bull market durations. The increased frequency of 5 consecutive up years since the 1980’s not a fluke, but an artifact of lower business cycle volatility, as the below chart of the US recession indicator shows. Of course, I’m not saying equities are guaranteed to go up this year or anything. Just that we should look at statistical observations like this with an awareness for the drivers.

This chart also go a lot of attention:

There are a few things to note here. First, margin debt is also used for shorting. So the increased prevalence of High Frequency Trading and the increase in Hedge Fund AUM, both of which use shorts to offset market exposure, would’ve automatically lead to an increase in margin debt. Second, this chart suffers from base effects. Aggregate USD debt to GDP was much lower 20 years ago. Third, the comparison is wrong – instead of the S&P, we should look at the market cap of all dollar denominated equities. This is because the universe of US dollar denominated equities have increased much more than the S&P. Ali Baba, for example, does not meet S&P listing requirements due to it being a foreign company. If this chart is adjusted for these factors, the margin debt picture actually looks bullish, IMO.

This chart was also very good:

My takeaway is that the bond market is strongly likely to mean revert on a 1 year time frame after extreme moves. Note that chart and the tables are of total returns. Which means it includes interest. Also note that in the top left table of bond returns in good years, the bond yield at the start of each of those subsequent years was higher than the return in the subsequent year. Which means that the yield CHANGE in each of those subsequent years was higher. This table below illustrates:

Year Yield Chg Subsequent Yr Chg

1989 (1.01) 0.27

1993 (1.05) 1.53

1995 (1.93) 0.69

2000 (1.02) 0.01

2008 (1.78) 1.97

2011 (1.44) 0.06

2014 (1.22) -0.33 so far

Not also that the lowest subsequent year changes were all because of a recession in the US or Europe the subsequent year. (1990 & 2001 in the US, 2012 in Europe) And yield STILL ended higher.

Now, this shouldn’t really be terribly surprising. The tendency for mean reversion across asset classes is well documented. What WOULD be surprising is if yields do NOT end the year higher.

Separately, this interesting table is via Citi’s Brent Donnelly:

Very good:



  • US Retail Sales declined -0.9% vs -0.1% exp. The control group fell -0.4% vs +0.4% exp.
  • US Import Prices declined -5.5% vs -5.2% exp and -2.3% prev
  • The European Commission signalled it may show leniency towards Italian and French spending plans by unveiling new guidelines that allow for greater flexibility when judging whether Rome and Paris have violated EU budget rules.
  • JPM CFO: sees strong spend trends


  • Wed: Japan Machine Orders, UK RICS House Prices, AU Employment
  • Thu: US Empire Manufacturing, Core PPI, US Jobless Claims, Philly Fed
  • Fri: US CPI, U Michigan Sentiment, Williams speaks
  • Mon: US Holiday, NZ House Prices, China Retail Sales, IP, GDP
  • Tue: German ZEW, US NAHB Housing Survey,

2 thoughts on “Recap 2015-01-14: View on Gold, Gundlach’s Charts

  1. Again on UST. Your analysis on Gundlach’s charts on the best years for 30yrs UST, seems to forget that the yield curve first flattens in anticipation of the recession and then steepens when the CB cuts rates. That’s why IMHO the subsequent year the yield change is positive.

  2. Also, when you say that the bond market will mean revert, you dismiss the fact that half of the World will fall into deflation. The Fed won’t hike in 2015 and, since there are no alternatives left in the Bond Market, UST will keep rallying.

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