Precious Metal update

You may have come across some info in regard to the  Basel III potential impact on Gold price.  Here is an article  by Mathew Piepenberg via GoldSwitzerland.com, which covers pretty well the changes.  The way I look at it is that physical gold price will probably become the main price discovery driver.

Basel III requires commercial banks to change their “net stable funding ratio” for gold held as a tier 1 asset on their balance sheet from 50% to 85% to make banks “stronger and more resilient in times of crisis.” Translated even more simply, banks can’t use as much “maturity transformation” or “duration mismatches”—i.e., leverage and short-term money for long-term speculation (arbitrage)—to buy and sell precious metals, among other things. What we do know from Basel III is that all that unallocated paper gold on the banks’ prior balance sheets needs to be re-considered, re-shuffled and re-classified.

As previously highlighted, Gold’s pricing  holds a political weight too. Macron’s idea to sell some Gold reserves for an Africa Aid Package on june 10th is a a good exemple.

The “Flation” debate (inflation vs deflation) has been the main driver for Gold the last few years.  USD negative Real Interest Rate (blue line) and inverted Gold Price ( red line).

Vieved  differently. In Green the ratio of ZROZ/GOLD  and Black  IEF/GOLD.  Treasury Bonds did break lower against Gold in 20 and 21 and expectations were that Gold would “easily” reach the $2300-$2500 level.  The chart patterns suggest a more complex process. I do believe that the current massive government fiscal transfers are not yet the catalyst for sustainable inflation. In fact, I think that we still need a “last” deflationary scare before political forces across the left and right spectrum, fully embrace what I call “Money for the People”.  Only then, inflation will become a longer term “problem” and financial repression/rate supression will prove that the metal precious complex is an excellent “monetary insurance”.

Another way to look at it is M2 and Money Velocity.

I believe that Money Velocity will become one of the most watched indicators.

Here is a different angle again.  The Pink line is Money velocity and the Black line is  the famous Value/Growth or Value/Broad Index ratio.  Value investors have been in “pain” for a long time and we have many reasons behind that.  Deflation to Inflation is a process. Japan is a perfect example but Japan has been able to maintain a much stronger social cohesion comparing to the rest.

In fact, the whole asset pricing process is linked to the same thing.

Patience is the mother of all virtues.  Gold seems to be range bound against bonds.. In your portfolio construction, the precious metal complex is an important piece. Weak price should be viewed as potential opportunity.

Gold is  currently underperforming against basically all asset classes. Here, the ratio GOLD/SPY (S&P500).  The “good” side of it is that the US stock market is still underperforming Gold since 2001. The symmetry of this gigantic apparent  Shoulder, Head, Shoulder pattern is “scary”.  Last year, relative Gold price action was looking much more constructive and things took a 180 degree turn. In fact, all asset classes have shown strange behaviors the last 18 months and it seems that it might keep going like that. My overall impression is that the market is “working” on fooling everybody one way or the other.

here against bonds

Christopher Cole’s work  (Artemis Capital) about portfolio construction has given me food for thoughts.  Gold and I include the whole precious metal complex, is a core position. Extremes within the complex will be used to switch positions. March 20 was a good exemple, part of Gold was switched gainst Silver and some miners.