Faith, i and the PHD guy

When I wrote about gold mid-2016, it was to convey that gold, $1350 at the time, was becoming cheaper relative to all the monetary madness of the decade. It was still a currency, and still no one’s liability, and still not going away as a form of insurance. Some will forever reference bulls as bugs of barbaric relics and pet rocks, touting conspiracy theories. In collecting some thoughts today, sentiment is improving, mostly because monetary madness has not.

Gold is up 10% since, finally cracking a 6 year range.


For all the gold in the world, 10% is less than a $trillion. Spitballing, over the last 3 years US debt alone is up another $3T, global central bank balance sheets are up $3T, and the global amount of negative yielding bonds are up another $3T. The SP500 is up some 900 pts, 43%, and US stock market capitalization relative to GDP has gone from 120% to 145%. The GDX gold stock index in no higher then it was back then. So relatively, the gold market is still getting smaller.

Gold production is up a few percent, and with the price bump call the current annual production pace $160B, pittance on global monetary scales. The US alone will supply their treasury bond market with over 5x that number in just the last 6 months of 2019. The Fed’s sudden new temporary not-temporary repo liquidity facility, advertised as not-QE, surfaced out of the blue and already popped from $30B to $45B for term, and from $75B to $120B for overnight, in a matter of weeks. The financial system needed some sizeable liquidity in a hurry. Why?

Interestingly, at least for the conspiracy theorists, last month a few JP Morgan traders were indicted for manipulating gold markets between 2008-16. That’s quite a lengthy stretch of bug ranting and regulator un-detection. A reminder, this was coincidentally during the great crisis and bailouts and QE becoming a new standard for monetary madness. How could America’s largest bank, with the best systems and oversight scrutiny possibly have known? For nine years.

Of late some notable voices are stepping up for said pet rock. It seems the spread of Japanification, ECB insistence on destroying their banking system with negative rates and the fact it took less than a year for the Fed to fully buckle from normalizing interest rates to full-on ease is collectively challenging the perception that central banks have everything under control. As we ponder future policy moves like MMT on the other side of this artificially extended cycle, folks like Ray Dalio, Paul Tudor-Jones, Jeffrey Gundlach, and Stanley Drukenmiller are vocal about quite liking gold. The doorway isn’t very wide should the burgeoning asset management world also decide to like this insurance currency enough to allocate a few incremental percent of assets under management.

Another interesting voice piped into the conversation, at least from a ‘look at what they do not what they say’ perspective. Germany bought some gold for the first time in decades. Not much, but after protesting ECB’s latest liquidity provision, and before Drahgi’s farewell speech and Lagarde getting the keys to the ECB printer room, was this some kind of suggestion to change the locks? If Germany is really considering buying more gold, with 10 year German Bunds trading at -0.35%, the funding looks reasonable, wouldn’t you say?

h/t, Bloomberg

To maintain balance, I get that there are some gold bugs out there forever preaching end of world theories, have a basement full of canned goods and pick hobo names for a laugh. (Do you think ‘Eddie the Ink’ Quince is taken?) But bugs aside, there is no such thing as an over-zealous insurance salesman in a pragmatic world. Isn’t that what the above famed investors really are?

Speaking of pragmatic, global powerhouse consultants McKinsey just came out with a report, The last pit stop? Time for bold late-cycle moves, in which they warn that as many as a third of the world’s banks won’t survive the next crisis unless they make some current late cycle adjustments. The report gets into themes, of scale, consolidation, disruption and fintech. Nowhere however, does it mention how a notional $542T (only $12.7T gross) derivative market might unfold.

Also speaking of pragmatic, I’ll repeat, America’s largest bank had 3 traders manipulating the gold market for 9 years. So clearly the rest of their books, and everyone else’s, are just fine? And speaking of Germany and banks and books, Deutsche Bank…


Finally, for this gold update, I’ve brought a new friend.

I came across a DoubleLine research piece by PM Jeffery Mayberry The Power of Copper-Gold: A Leading Indicator for the 10-Year Treasury Yield that I’ve found to be a curiosity for many reasons. Firstly, weaned in bond markets in the 80’s and 90’s, I’d not come across this mental gymnastic routine before. Also, post whatever economic workout we may currently be headed for, I’m a macro theme electrification long term copper bull.

As the paper lays out, the ratio of copper prices to gold prices can perform as a directional indicator for US 10 year yields.

For the last several months the short term relationship has been uncanny actually, especially over the recent short term elevated bond market volatility.

Blue – US 10yr yield
Orange – Copper/Gold

Equally intriguing over the medium term.

Blue – US 10yr yield
Orange – Copper/Gold

Even in the long term the direction correlations, while not proportional, are fascinating.

Blue – US 10 yr yield
Orange – Copper Gold

We know correlation is not causation, but let’s pretend that somewhere deep in here lurks at least some philosophical monetary logic.

Copper/Gold approximates (~=) US 10 yr yield

Dr. Copper is said to be the metal with a real world PHD in economics, even able to predict turning points in the economy. Note, this PHD is not to be confused with the academic kind, the thousand of which roam Federal Reserve hallways struggling to accurately predict little.

Copper = PHD

While gold is a currency, accepted as a reserve of central banks, it needed a more encompassing definition, so I’ve respectfully defaulted to a brilliant wordsmith and one of the world’s foremost experts and historians in all things monetary.

“The price of gold is the reciprocal of the world’s faith in central banks.”  – Jim Grant 

Gold = 1/Faith

Seems logical doesn’t it, that insurance premiums would rise when faith in the system falls?

US 10 year yields are a price of American money that seems to price much else.

US 10 year yields = i


i =PHD/(1/F) or i = PHD x F

So it stands to reason that the price of money, i, could reflect some multiple of real world economic growth forecast and faith in central bankers. With growth struggling and faith waning, maybe this explains why interests rates are destined to remain so historically low.

But then does it also suggest that if the price of money were normalized higher from artificially depressed levels, the economy and/or faith might improve? Ah, if only correlation was causation.

Clearly this isn’t a linear exercise, but for a lark I wondered what a bearish and faithless economic downturn could imply for interest rates. Plucking $2 copper and $2000 gold right out of the air, the last few years of copper/gold relationship implied a US 10 year yield of 30-40 bp, frighteningly still above where most of Europe resides today.

If only quantifying faith in central bankers could be so easy.