Concurrent Inflation PLUS Deflation??

Gordon T Long Research exclusively located at MATASII.com

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MACRO ANALYTICS - MARCH

WHY IS GOLD FALLING?

Gold has been falling because:

The 10Y UST Real Yield is Rising,
The Chinese 12 month forward Credit Impulse is rising.
Inflation Break-evens are driving up the Nominal Value of the 10Y UST Yield,
The US dollar is presently stable and maintaining its value.

Let's look at the first two to specifically understand the Gold pricing correlation that has been in place since the 2008 Financial Crisis.

MACRO ANALYTICS - 03-04-21 - Coming Deflationary Tsunami - w/ Charles Hugh Smith

GOLD VERSUS THE 10Y UST REAL YIELD

Since just prior to the 2008 Financial Crisis Gold has tracked very closely against the value of the 10Y UST Yield. It has been particularly tight since the 2018 "VIXameggon" in the short term funding markets.

FURTHER TIGHTENING IN THE FALL

The relationship tightened even further on a daily basis last fall. Shown to the right is the 10Y Real Yield drawn inversely to better mirror the Spot price of Gold. (As Real Yields Rise, Gold Falls)

THE RELATIONSHIP HELD TIGHT DURING GOLD'S FEBRUARY DRAW DOWN

The relationship tightened even further on a daily basis last fall. Shown to the right is the 10Y Real Yield drawn inversely to better mirror the Spot price of Gold. (As Real Yields Rise, Gold Falls)

GOLD HAS ALSO HISTORICALLY TRACKED THE 10Y UST RATE CURVE

A further tool is to understand that the spot price of Gold as might be expected, also tracks the 10 UST Real Rate Curve (Chart to Right)

THE CHINESE CREDIT IMPULSE

Though it is important to understand the above relationship of Gold with the Real Rate of the 10Y UST, It is just as important to understand what is driving the 10Y UST Real Yield? That critical piece of information is about understanding the importance of the Chinese Credit Impulse!

The Chinese Credit Impulse has consistently lead the 10Y UST Real Rate by 12 months for over a decade! To track this is to have a fairly good indication of what to expect regarding real 10Y UST rates. It holds equally well for the longer dated 30Y UST Real Yield.

The concern shown above is that we might expect real yields to continue to rise through Q3 2021!

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CONCLUSIONS

In the next newsletter we will continue this discussion and address:

Inflation Break-evens which are driving up the Nominal Value of the 10Y UST Yield,
Fisher's Equation concerning the relationship of Inflation Break-evens, Real Rates and Nominal Rates,
The US dollar's relationship with Treasury Yields.

“What do you get when you combine potent fiscal and monetary stimulus with a U.S. economy on the cusp of a rebound amid surging oil prices? The answer: fears that medium-term inflation relative to the longer term running at the fastest clip since nearly the turn of the century.

The spread between U.S. five- and 10-year inflation break-evens is now the most positive it’s ever been in Bloomberg data going back to the start of 2002. The differential, which may be thought of as the market’s evolution of inflation over the medium term versus the longer term, went briefly above zero following the financial crisis as well, but wasn’t so pronounced.

The differential is a sign of the market’s collective thinking that the $1.9-trillion fiscal relief ready for endorsement by the House will stoke price pressures over the medium term without necessarily impinging on the evolution of inflation over the longer term. In other words, secular inflation may still be elusive, which is another reason why the Fed may decide to look past price pressures in the here and now"

.... ”

Ven Ram, Bloomberg Macro Commentator

VIDEO ADDENDUM RESEARCH

MY VIDEO COLLABORATOR, CHARLES HIGH SMITH POSTED THE FOLLOWING WITH OUR VIDEO

The "Wait and See" Economy's Moment of Truth

The "wait and see" economy is about to face its moment of truth, and one truth is the $1.8 trillion being passed out like candy is already spent.

The defining phrase of the U.S. economy for the past year is "wait and see": every enterprise impacted by the pandemic that didn't close immediately has been in "wait and see" mode, clinging on to the hope that once the pandemic ends then everything will roar back to life, bigger and better than before.

With the promise of herd immunity fast approaching, the moment of truth for "wait and see" is also fast approaching. The conventional view is that the trillions of dollars in stimulus kept business as usual alive and ready to soar back to the good old days. The almost $2 trillion injection of financial smack currently in progress will ignite the afterburners and the economy will rocket higher than anyone can imagine.

The problem with this rosy view is the economy was on fumes before the pandemic, as Gordon Long and I highlighted in our 53-minute presentation, The Coming Deflationary Tsunami. Interest rates had been falling for 40 years and there was little leeway for more of the magic of falling rates. The spending of the upper middle class had already rolled over as the awareness that the longest expansion in U.S. history was faltering seeped into financial decisions--and no wonder, since every trick in the book had been required to keep it alive: zero interest rates, quantitative easing galore, tax cuts, massive deficit spending and speculative bubbles in every asset class.

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