First, mapping the level of M2 money supply onto the gold price offers increased utility relative to monitoring its rate-of-change alone.
The level shows gold reached a major support in Nov 2022.
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Here we use a projection of a 94 year old gold price from 1929. One may think, what really can that tell us about the modern gold market?
It turns out the mid-cycle-level has functioned as support/resistance many times in the past 50 years and 4 times in the last 7 yrs.
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The two drivers of the gold price are rising inflation expectations and a falling long-term yield.
For much of 2022, gold had one foot on the 'brake' (from rising yields) and one foot on the 'accelerator' (from rising inflation expectations).
Thus, price did not do much.
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As early as March 2022, gold began pricing in higher trending inflation expectations. Concurrent with this, the CPI inflation rate was topping >8%.
To this day, gold has continued to price in a rising inflation expectation thus closing the gap with the CPI inflation rate.
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But by Oct-Nov 2022, the 'brake' from rising yields was being let off as the 10yr yield began to initially peak setting up the first leg up for the gold price.
Then by Mar 2023, both feet were on the 'accelerator' as yields began to fall and the gold price took off.
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The case for gold is simple when condensed down to its basic elements.
On March 10, 2023 when the gold price was $1,867 and the 10yr yield had broken-down, we put out the following post:
(8/9) giresearch.substack.com/p/low-complete…
Historically, how has CPI based inflation (which is 1yr backwards looking metric) compare with the 10yr inflation expectation (which is the expected inflation rate implied over the subsequent 10yr period)?
Intuitively, the 10yr inflation expectation should be a more moderated than YoY CPI due to the longer period it is averaging over.
Although technically incorrect, one can at least form a moderated CPI by looking at its 5yr EMA which currently is around ~4.5%.
Although the CPI inflation rate will likely form a YoY peak soon, the questions is at what level will it equilibrate as it moderates. With the 10yr inflation expectation at sub 3%, the market seems to expect inflation to return to the prior level ~2%.
Setup is very comparable to the 7.5yr cycle that ended in late-2008.
▪️2yr yield peaks in Jun'07
▪️GDX/Gold ratio reaches low two months later in Aug'07
▪️Gold in consolidation then advances to $1k over the next ~6 months; a ~50% run.
The question has been asked, what is holding the gold price up so well despite the 10yr real-yield putting in one of its widest divergences seen on the chart?
One could make the case that it is the record negative short-term real-yield (3mo T-Bill yield less CPI YoY % chg) that is in-part holding it up.
Here is the same chart as above but with the USD index (DXY) and the short-term real-yield included.
One can see that even in the 1970s, the short-term real yield never got quiet as negative as it is currently reading.
If they were to hike 75bp tomorrow that would put the fed funds rate around the downward sloping line which is a potential target. It's a possibility that they pause from there. Lets see.
My long-term targets for gold are based on the M2 scaling offset by new mine supply and that data has not changed much.
As for GDX, it correlates better with GLD tonnes than the gold price itself. So far the GLD tonnes are holding at a relative premium. This despite plenty of reason to liquidate holdings considering how volatile market conditions are.
Coinciding with the large CPI print, on Friday, the 10yr Treasury Note yield spiked up 11bp to a new local high of 3.15%.
Breaking the 10yr into two sequential 5yr periods, we can express the 10yr yield as its real & inflation components for each period.
Despite the high inflation headline number, only a minority the day's rise (~15%) can be attributed to the change in inflation expectations with both components well off their highs.
To top it off, the 5yr forward inflation expectation actually decreased on the day.
The majority of the rise in yields was attributable to real yields:
▪️~55% from the 5yr real yield and
▪️~30% from the 5yr real yield, 5yrs fwd.