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GYN Monitor 1
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April 23, 2008
Outlook for Gold: Headwinds from Interest Rates and Carry Trade.
The Japanese Yen tells the story
In mid March prices of Treasury bonds and notes peaked and turned down ending a buoyant rally that began in mid 2007 as the economy slowed down, the subprime credit crisis unfolded, and the Fed started a dramatic campaign of interest rates cuts. Synchronous with these events, a furious unwinding of the Japanese Yen carry trade produced one of the sharpest rallies ever seen in this currency. This rally also ended in mid March. Gold prices followed a similar pattern with a correlation that went largely unnoticed until recently. The earlier association of Gold with Oil prices and the Euro (see the GEOs) has been severed since the mid March peak as both Oil and Euro continued their advance to new highs. Whether this parting of their ways will be temporary or lasting remains to be seen (see also
An abrupt about face of the Gold Bull: reasons and consequences).
In Chart1 presented below, there is no mistaking the tight correlation between the Treasury 2 years Notes, the Japanese Yen, and the price of Gold. Since the Yen's rally is known to have been associated with the unwinding of the Yen carry trade, by inference it is plausible to think that the carry trade has resumed as the yield of the Tresury notes climbed back to above 2.0 %. Since mid March, this yield has risen from a cycle low of 1.46 to 2.2% and, together with other long maturity Treasuries, has produces a marked re-steepening of the Yield Curve (Chart 2). Gold is subject to a carry trade as much as the Yen (and to a lesser extent as the Swiss Frank) and therefore is negatively affected to a similar extent.
Due to these developments, Gold can be expected to remain under pressure until a new equilibrium is reached between rising rates and lower Gold prices. However, because of the multiple bullish factors favoring Gold, as reflected in the very bullish level of the Gold Barometer, this pressure is more likely to translate into a prolonged sideway price movement than in any severe decline.
In view of the relationships highlighted above, henceforth the short term outlook for Gold will be also evaluated by monitoring the behavior of the 2 years Treasury Note and the Yen (the GYN trio) in addition to the GEO trio.
Outlook for Gold: Headwinds from Interest Rates and Carry Trade.
The Japanese Yen tells the story
In mid March prices of Treasury bonds and notes peaked and turned down ending a buoyant rally that began in mid 2007 as the economy slowed down, the subprime credit crisis unfolded, and the Fed started a dramatic campaign of interest rates cuts. Synchronous with these events, a furious unwinding of the Japanese Yen carry trade produced one of the sharpest rallies ever seen in this currency. This rally also ended in mid March. Gold prices followed a similar pattern with a correlation that went largely unnoticed until recently. The earlier association of Gold with Oil prices and the Euro (see the GEOs) has been severed since the mid March peak as both Oil and Euro continued their advance to new highs. Whether this parting of their ways will be temporary or lasting remains to be seen (see also
An abrupt about face of the Gold Bull: reasons and consequences).
In Chart1 presented below, there is no mistaking the tight correlation between the Treasury 2 years Notes, the Japanese Yen, and the price of Gold. Since the Yen's rally is known to have been associated with the unwinding of the Yen carry trade, by inference it is plausible to think that the carry trade has resumed as the yield of the Tresury notes climbed back to above 2.0 %. Since mid March, this yield has risen from a cycle low of 1.46 to 2.2% and, together with other long maturity Treasuries, has produces a marked re-steepening of the Yield Curve (Chart 2). Gold is subject to a carry trade as much as the Yen (and to a lesser extent as the Swiss Frank) and therefore is negatively affected to a similar extent.
Due to these developments, Gold can be expected to remain under pressure until a new equilibrium is reached between rising rates and lower Gold prices. However, because of the multiple bullish factors favoring Gold, as reflected in the very bullish level of the Gold Barometer, this pressure is more likely to translate into a prolonged sideway price movement than in any severe decline.
In view of the relationships highlighted above, henceforth the short term outlook for Gold will be also evaluated by monitoring the behavior of the 2 years Treasury Note and the Yen (the GYN trio) in addition to the GEO trio.
| Chart 1: Sychronous moves T2 Note,Yen, and Gold |
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| Charts courtesy of futuresource.com April 23, 2008 |
| Chart 2: Treasuries Yield Curve |
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| Charts courtesy of Bloomberg.com. - April 23, 2008 |
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