Rapidly Approaching
This author and his family are currently undertaking a move. We are knee deep in the burdensome process of packing, traveling, and unpacking. As a result, time is tight. Both this week and next, HAI will be limited to very brief updates.
This week started with very encouraging price action in the precious metals, but it ended on a discouraging note. As the week progressed, a dollar spike and a surge in global yields ultimately pulled the rug out from under the metals. In the short term we certainly could see that trend continue. Gold could face another leg lower to test support around the $4,350 level—but that is short term.
From HAI‘s perspective, the bigger-picture macro view suggests that this week actually marked an important bullish milestone for the precious metals thesis. Under the growing pressure of a Hormuz-driven energy price spike, real signs of cracks emerged in global sovereign bond markets this week.
Inflation is clearly starting to ramp up again. This week we had a hotter-than-expected Consumer Price Index (CPI) reading (3.8% y/y) and a much-hotter-than-expected Producer Price Index (PPI) reading (6.0% versus estimates of 4.8%).
Producer prices typically lead CPI and PCE, so given that the Strait of Hormuz (and it’s 20% of global oil export traffic) remains closed, we can interpret white hot PPI readings as a preview of coming attractions for already ramping CPI and PCE. What’s worse, at present, global oil inventory stockpiles are being drawn down at the fastest pace in history to compensate for the Hormuz shutdown. Every day Hormuz remains shut, global inventory reserves come closer to the “tank bottom” moment Jeff Currie said last week could be hit in late May in Europe and in the July 4th period in the United States.
If we get too close to the tank bottom moment while the Strait of Hormuz is still essentially closed, that will be, in HAI‘s view, when current complacency will turn to panic.
In that context, this week’s market disappointment that the Trump/Xi meetings in China didn’t lead to any progress on reopening Hormuz may tell us something. It seems to indicate that the market is awakening to the fact that the too-close-to-the-tank-bottom moment is now fast approaching.
That approaching panic was most obviously manifest in global bond markets. U.S. 10-year Treasury yields spiked 24 basis points on the week to reach 4.6%. U.K. 30-year gilt yields soared to their highest levels since 1998.
In a healthy system, rising sovereign bond yields typically strengthen the currency because the higher interest rates attract global capital seeking better “safe” returns. What’s crucially important about the current global yield spike is that in Japan, the U.K., and Europe, the yield spikes are occurring alongside falling currencies. That indicates market recognition of an unhealthy system.
In turn, that means that the typical mechanics of global capital being attracted to better safe returns is breaking down. The nominal bond yield returns are higher, but they are no longer perceived as safe if the country in question has to incur a fiscal crisis to pay those higher yields or has to print the money to pay the yields. That higher yield alongside a weakening currency is the signature of emerging market countries with debt problems trying to print their way out. They have nominally high-yielding debt, but crashing, hyperinflating currencies.
Major developed countries are starting to flash an early stage of that same emerging market debt/inflation problem signal. And while the U.S. dollar was up this week, it has been mostly sideways of late. It has not spiked, as would have been historically expected, during the Iran conflict.
Of course the U.S. bond market has been very unhealthy for a very long time, but the muted dollar amid a crisis and a yield spike is new. It suggests that, as in Japan, the U.K., and Europe, the bond market in the U.S. is now beginning to see the writing on the wall.
The renewed inflation surge will soon force policymakers to choose between a policy of “save the currency” (hike rates aggressively, let bond yields rise sharply/bond prices fall sharply and risk a devastating debt spiral in an effort to try and quell inflation/support the currency), or a policy of “save the bond market” (print U.S. dollars to buy bonds and cap yields to maintain nominal U.S. government solvency while turbocharging already accelerating inflation and crushing the currency).
In HAI‘s view, this week’s bond market rebellion applied pressure for policymakers to make a decision. They can save the bond market or the currency, but not both.
The decision will almost certainly be to print money to save the bond market despite debasing the currency. In the short-term, these dynamics may lead to risk-off markets and potentially falling precious metals. However, the more markets go risk-off and bond yields rise, the sooner policymakers can be expected to act aggressively to save the bond market. That policymaker decision will almost certainly represent the firing of the starting gun for the next major leg higher in this generational precious metals bull market.
HAI doesn’t know whether precious metals will front-run that decision by preemptively moving higher or continue the ongoing volatile correction phase until policymakers act. Either way, this week’s bond market action suggests that the time for policymaker action is rapidly approaching.
Weekly performance: The S&P 500 was up 0.13%. Gold was down 3.73%, silver lost 5.30%, platinum was down 3.70%, and palladium was off by 4.03%. The HUI gold miners index was off 6.95%. The IFRA iShares US Infrastructure ETF was down 1.14%. Energy commodities were volatile and higher on the week. WTI crude oil jumped 10.63%, while natural gas gained 7.42%. The CRB Commodity Index was up 2.53%. Copper was off 0.12%. The Dow Jones US Specialty Real Estate Investment Trust Index was down 2.62%. The Vanguard Utilities ETF was down 1.91%. The dollar index was up 1.40% to close the week at 99.27. The yield on the 10-yr U.S. Treasury was off 24 bps on the week, closing at 4.60%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
