Tuesday, August 7, 2018

Who needs gold when real growth is picking up?

Chart #1

I've been posting updates of Chart #1 for at least the past 5 years. It never ceases to amaze me that the prices of two different assets should be so highly correlated. Of course, gold and TIPS do share a few things in common: both offer promises/guarantees of some sort. Gold promises to maintain your purchasing power over time, and TIPS offer you a government-guaranteed real rate of interest. Both, in other words, offer a form of protection against inflation, and both can be considered "safe" ports in an economic and/or financial market storm.

(Note: in the chart I have used the inverse of the real yield on 5-yr TIPS as a proxy for their price. Like any bond, the price of TIPS goes up as their real yield declines, and vice versa.)

For the past year this chart has been suggesting that gold prices were lagging the decline in TIPS prices. Gold now appears to be "catching up." Awfully tempting to see gold prices move still lower.

Why should these two asset prices tend to correlate so well?

Gold and TIPS prices rose in the late 2000s as the economy crashed. A weaker economy made gold more attractive because many figured that monetary easing in response to significant economic weakness might spark a rise in inflation. And gold is a natural safe place to hide when there is economic and financial market chaos. TIPS rose in price as well, because there was strong demand for the guaranteed real yields that they paid when other asset prices were collapsing.

For the past 5 years, gold and TIPS prices have been irregularly declining, because the market is coming to appreciate that the outlook for economic growth is improving, and that lessens the need for accommodative monetary policy and that in turn lessens the risk of an unexpected rise in inflation. Moreover, the returns on other assets have been very attractive of late, and that weakens demand for gold and TIPS because neither promise much in the way of return (gold pays nothing, and the real yield on TIPS is meager). Plus, there is just less need these days for the security and safety of either asset. And of course there is less demand for inflation hedges now that we have seen two decades of inflation averaging 2% or less, and now that the Fed is beginning to reverse its quantitative easing stance.

Chart #2

Chart #2 shows how real yields on TIPS do indeed track changes in economic growth fundamentals. A very strong economy in the late 1990s saw very high real yields on TIPS, whereas the past decade of sub-par economic growth has seen very low real yields. Both growth and real yields have been moving higher in recent years.


steve said...

Our moron POTUS is not backing down on taxing American consumers in his effort to bring China to their knees. A more obtuse foreign policy cannot be imagined. Furthermore, voting results in Ohio and Kansas suggest trouble in Nov.

DT is pulling defeat from the jaws of victory with his idiotic tariffs and despicable persona. As a father of five I cannot possibly understand how anyone can support this misogynist, adulterous and callous megalomaniac.


randy said...

A depressing situation is the democrats take the house. It will then be even harder for conservatives that can't stand Trump to not support him in 2020.

ckhajavi said...

Scott - there is a growing narrative that dollar strength and the feds balance sheet unwind is leading to emerging market stress (Turkey as example) that is going to spiral out of control - I think it’s nonsense given the dxy isn’t even back to last years levels / everyone was complaining about a weak dollar not that long ago / rates have moved but are still quite low - Argentina and turkey seem very indiosyncraric to me and not a good barometer for the em complex - regardless I think a post on the topic (I realized you have written on this in the past) would be greatly appreciated

Unknown said...

Donald Trump is best president since Ronald Reagan unless of course you like Fascism, Communism, Islam and/or Socialism. He is putting America first and getting great results especially after 28 years of the Neocon/Islamist Bushes, Clinton and Obama. I can't for the life me understand how anyone could have voted for Obama or Clinton unless you hate your country and are racist as 99.99% of Democrats are. Then again the Democrats were the slavery, Jim Crow and KKK Party so nothing has changed.

Larry said...

unknown, well said.

WealthMony said...

Steve, please. We can tell you're upset, but President Trump is not really a moron. He does not have an intellectual disability. If you're wanting to insult the president, you've done just that by calling him a moron, but his mental capabilities hardly fit the technical requirements for a moron. I also think you've missed something if you think DT is a misogynist. Even if he is, it would have no impact on the economy!

My biggest worry is that the Fed will make another common policy error and eventually kill this long period of prosperity we are experiencing.

steve said...

The POTUS is the paradigm as leader of the US. Is anyone seriously suggesting that DT represents a model to be emulated? Not a misogynist? He's cheated on his wife's multiple times-that we know of! He has his little hissy fits of tweeter and his trade policy of trying to bring China to it's knees is at best dangerous-not to mention the fact that it represents a TAX on US consumers. He employs cronyism ad hoc. So yeah I'll stick with my MORON label.

DT is NOT a conservative and of course worst of all? The response from the left is to go FURTHER left-towards socialism. The schism is this country is mind boggling.

You guys have your heads in the sand.