Bonds, Gold and the Dollar: The Macro View
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I believe that when assessing implications and observations based upon charts, the macro, or longer term perspective, must be the starting point, and any shortening of the observed time frame should be viewed within the context of the macro perspective.
Below I present a monthly chart of 30-year T-Bond futures, Gold futures and the US Dollar Index dating back to the late 70s. This chart should thus render an interesting picture of these markets during the tail-end of the previous secular bear market for stocks, the 80s and 90s secular bull market, and the present secular bear market of 2000 to present. This reminder of the macro perspective may help you to better understand the current shorter-duration trends that you may be tracking.
Let's begin with the most glaring observation provided by this chart. 30-year T-Bond futures (seen as the blue bar chart) have been in a well-defined bullish trend-channel since 1981, and are currently just off their all-time high established in September of last year. This trend channel coincided with the disinflationary period associated with the secular bull stock market of 1982 to 2000 (seen as the time-frame represented by the large red rectangular box – stock index prices not shown), and the disinflationary/deflationary period associated with the current secular bear stock market (seen as the time-frame represented by the large blue rectangular box). Since yields move inversely to bond prices, Treasury yields are obviously at historic lows.
Treasuries have recently benefitted from the supportive efforts of our Fed's quantitative easing measures. But do not assume that quantitative easing alone has led to the rally in bonds. You can see on this chart the well-established trend that has been put into place mostly because of the disinflationary/deflationary forces that have prevailed over the last 30 years. In the early 1980s, we exited a period of elevated inflation and embarked on the current disinflationary journey that may or may not be coming to an end. But quantitative easing has occupied a disproportionally small time segment of this bond bull market (see the QE era shown as the small green rectangular box).
If you belong to the camp that believes the Treasury rally is nearing its end, realize that you are definitely picking a top in the Treasury market, and that at least one of the following two things most likely needs to occur for Treasuries to break their up-trend:
- The trend towards deflation needs to be reversed, with inflation gaining a permanent, and not transitory, foothold. I emphasize permanent because shorter-term cyclical trends can develop and fool you within a longer-term secular trend.
- The credit worthiness of the US needs to be dramatically revised down in the world's view. For this one I suggest you watch people's actions and refrain from listening to their words. For instance, in recent years China has often spoken about how fiscally unsound the US is becoming, and then has proceeded to buy more US Bonds, allegedly sometimes through foreign nations. In other words, people often put their money where their mouth isn't. If, on the other hand, foreign nations ever significantly retreat from purchasing Treasuries, it would be problematic for the Treasury market.
It may sound to you as though I am advocating purchases of long bonds. I am not. I am instead presenting you with what you are up against if you are bearish Treasuries, and I am offering a macro-perspective so you get a full picture before making your final assessment about longer-term Treasuries. The Treasury rally of thirty years will certainly eventually come to an end, and it may already have. But it also may not have. If significant deflationary forces rise up once again, the bull market in Treasuries should continue. Also, any further Treasury market support by the Fed might once again be supportive of prices.
The next observation to view on this chart is the price trends for gold during the last 35 years. Gold futures can be seen as the red-colored line chart. Notice how gold has had parabolic rallies during each of the two most recent secular bear markets for stocks, 1968-1982, and 2000-present. During each period there was great economic concern; the 1970s actually saw significant inflation, while at present there are, thus far, only inflationary concerns. The period of 1976 to 1980 saw gold futures rally 760% to $873.00/ounce from $101.50/ounce, while 1980 to 1982 saw them pull back 66% to $297.50/ounce, a level that was then only 193% higher than the absolute low of 1976 ($101.50/ounce).
The current secular bear market for stocks has seen similar volatility for gold. The parabolic rally as measured once again by gold futures started from a low of $255.00/ounce in 2001, and reached a high in September of last year of $1923.70/ounce, 654% above that 2001 low. It remains to be seen if last year's high holds as the ultimate high, but it is noteworthy that this type of rally is not without precedent. In fact, this current rally in gold futures has not yet eclipsed the performance of the late 70s on a percentage basis.
The final observations I wish to share with you are on the US Dollar. The US Dollar Index can be seen as the green-colored line chart. Note the following Dollar observations expressed on this chart:
- The Dollar's descent from 1985 to the present – but also note how the Dollar, as measured by the Dollar Index, had been as low as 85.00 in 1987, while it was also as high as 88.70 as recently as June of 2010. It currently sits just below 80.00.
- The Dollar's significant rallies and breaks in the interim, which in and of themselves express volatility and are noted below:
- US Dollar Index at 127.00 in Dec of 1985
- US Dollar Index at 78.00 in 1992
- US Dollar Index at 121.00 in 2001
- US Dollar Index at 70.00 in 2008
- The two rectangular black boxes that represent relatively flat and sideways price movements of the Dollar Index over extended periods of time. Note the majority of time spent in these sideways price actions during the secular stock trends. Relatively short periods of volatility were followed by long periods of Dollar stability. In other words, lengthy and relatively stable price periods both followed and preceded shorter periods of extreme volatility.
Will the Dollar Index once again see a significant rally after the current sideways price action? Only time will tell. But I would like to mention one thing that intrigues me: After significant Fed accommodation, and rounds of quantitative easing and supposedly enormous Fed money creation, the US Dollar Index low of 70.70 remains the low; and it occurred in March of 2008, before all of the extra trillions of Dollars were supposedly added to the system.
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© 2012, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.
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