This trading saying is one that gets thrown around and it has been illustrated recently in the gold market. On April 08 it was flagged how attractive gold was looking to buy. Giles Coghlan, Chief Currency Analyst, wrote this “US 10 year yields surging, and the USD, but XAUUSD holds firm. If something can’t sell off on bad news then it can’t sell off at all. Gold longs look VERY attractive now” on Twitter.
Now the point of this post is to show you what can happen in a market when there is a clear investor bias. Usually, when yields are surging and the USD is surging then gold would normally be falling. Now from the start of April Fed speaker after Fed speaker came out outlining the case for a Fed 50 bps rates hike. On Tuesday 05 April Fed’s Brainard hinted that Quantitative Tightening could happen as soon as May. This was a surprise as investors were expecting a June QT. Brainard’s view was then confirmed by the Fed’s minutes. All of this sent the USD higher and US 10-year yields higher as investors braced for an even more hawkish Fed. Typically this would send gold lower. However, gold stood firm. This is what prompted a gold long as outlined on our webinar from the week ending April 08 ‘If something can’t sell off on bad news, then it can’t sell off at all’!
The structural case for medium-term gold longs remained in case that the US falls into a stagflationary environment. Gold is regarded as one of the go-to inflation hedges and many investors would expect new highs in gold markets if that is the case. Furthermore, at some point, US 10-year yields will drop as investors start to worry about the US falling into a recession. Also, in recent history, the USD typically falls in the 6 months after the first fed hike. So, a falling dollar, and falling yields (as long as inflation stays high), would be a great tailwind for gold. This was the reason for going long on gold on April 08. ‘If something can’t sell off on bad news, it can’t sell off at all’. Now gold has tested $2000 again and the case for gold is now a little more mixed, so this is not a long to chase now. This is especially the case with some decent data from last week out of the US. Retail sales recovered, industrial production picked up and the University of Michigan’s Sentiment also moved higher. This means that growth may not in fact be slowing, so the move higher in US 10-year yields and the USD is likely to keep gold-capped for now. However, expect signs of slowing US growth to give gold another boost.