Gold’s stealth move

While precious metals traders are focussed on Gold’s paper derivative markets as futures, ETF’s and mining stocks, the physical Gold market is doing its own thing. Since early 2016 wealthy investors have been buying physical gold at a rate that overwhelms the commercial trader shorting on the COMEX as this graph by Goldman Sachs shows.

What could be triggering this trend? Low interest and negative yielding bonds makes that the holding costs of precious metals do no longer exists in relation to these debt instruments.  The US 10 year T Note yield is often used as benchmark to calculate the cost of holding physical Gold.  As the real yield on this perceived ‘risk free’ debt instrument is practically zero, it is no longer positive compared to the cost of holding physical Gold. In other words: the opportunity costs have turned positive for Gold and negative for bonds.

You can also address the question what is a risk free return on a negative yielding bond? I would add that as the Central Banks are on full speed money printing spree again, the risk to hold corporate and government debt increases. The debt market is already in a bubble and leveraged. 

The risk of a bubble is that it can deflate, meaning that bond prices go south and rates will increase. For traders it is important to realize that both bonds and US stocks have risen in a low interest rate environment the past decade. If Central Banks lose control for whatever reason, the current US stock bubble is not not the place to go either.

Gold, Silver and depressed miners and commodity assets could be alternatives. 

2 thoughts on “Gold’s stealth move

  1. Thanks Trader Irene! I liked the reference to gold as the higher yielding alternative, albeit 0%, relative to negative yielding bonds.

    While currently the cost of carry is now opportunity instead of expense, we are moving into the era, as you suggest, where the market finally focuses on the irrefutable logic of gold as the better currency given fiat money erosion. I think this is an inexorable trend, that supercedes both the issue of carry cost (when there is one) and the classical attractiveness of gold as a fear bid asset.

    Like

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