My Gold True Fundamentals Model (GTFM) takes into account the seven most important fundamental drivers of the US$ gold price (the real interest rate, the yield curve, credit spreads, the relative strength of the banking sector, the strength of growth stocks relative to defensive stocks (an indicator of whether the financial world is tilting towards growth or safety), the general trend in commodity prices and the bond/dollar ratio) to arrive at a number between 0 and 100 that indicates the extent to which the fundamental backdrop is gold-bullish. 100 signifies maximum bullishness and 0 signifies minimum bullishness (maximum bearishness).

Although it can be helpful in figuring out when to buy/sell gold-related investments, the GTFM is not designed to be a market timing indicator. Instead, it indicates the direction of the pressure on the gold price being exerted by the fundamentals that matter.

The most recent significant shift in the GTFM (the blue line on the following weekly chart) was from bearish to bullish during the second half of February this year. Four of the seven inputs to the GTFM are bullish at this time, so the Model’s output remains in bullish territory.

I expect that the GTFM will move a little further into bullish territory within the coming month due to the Yield Curve input (one of the three currently-bearish inputs) flipping to bullish.

There are three ways that the Yield Curve input to the GTFM could turn bullish within the next few weeks, one or two of which probably will happen. One way is for the 10Y-2Y yield spread to become more inverted than it was in late-March. A second way is for the 10Y-2Y yield spread to signal the start of a steepening trend, which at this point of the cycle also would be a recession warning. A third way is for the 2-year T-Note yield to generate preliminary evidence of a downward trend reversal, which it could do by moving below its 50-day MA.

The following chart of the 2-year T-Note yield shows that the 50-day MA is a long way below the current yield. However, it is rising rapidly and should be above 2% by the end of this month.

Given what’s happening in related markets, I expect that the GTFM’s February-2022 upward reversal and shift into bullish territory will prove to be sustainable, meaning that I expect the gold market to have a fundamental tailwind for at least several more months.

[This blog post is an excerpt from a recent TSI commentary]

For 36 years the yield on the 10-year T-Note moved lower within the channel drawn on the following chart. Depending on how the lines are drawn, an upside breakout from this channel may or may not have just occurred. If an upside breakout has occurred or occurs later this year following a pullback over the next few months, would this confirm the end of the secular downward trend in interest rates?

It’s not that simple. Obviously, an upside breakout from the long-term channel would be consistent with the trend having changed from down to up, but prices often generate misleading signals via failed breaks below chart-based support or above chart-based resistance. However, there are fundamental reasons to be confident that a long-term trend change has occurred.

The fundamental reasons revolve around the monetary and fiscal responses to the pandemic in 2020, which in combination created such a massive inflation problem that the forces putting downward pressure on interest rates have been overwhelmed. The official response to COVID wasn’t the straw that broke the camel’s back, it was the bazooka that blew the camel to pieces.

There were two parts to the official COVID response that set the stage for a directional change in the secular interest-rate trend. First, there was the imposition of widespread lockdowns that caused the prices of most commodities to collapse and prompted a panic into Treasury securities, leading to a blow-off move to the downside in Treasury yields. Second, there was the effort by the Fed and the government to mitigate the short-term pain stemming from the lockdowns, which involved expanding the total US money supply by 40% in less than a year and ‘showering’ the population with money. The effort was very successful at mitigating short-term pain, but at the expense of economic progress and living standards beyond the short-term. The adverse effects of the actions taken to reduce/eliminate short-term pain during 2020 and the first half of 2021 will be evident for many years to come.

We thought that the secular downward trend in interest rates had ended shortly after the blow-off move in Q1-2020, and this opinion has been subsequently supported by a lot of evidence. However, all secular trends have tradable countertrend moves. We are anticipating a tradable move to the downside in US government bond yields over the next several months.

[This blog post is an excerpt from a recent TSI commentary]

The phenomenal rise in the US monetary inflation rate from early-2020 to early-2021 fuelled a speculative mania in the stock market and set in motion an economic boom, while the subsequent plunge in the monetary inflation rate will lead to an equity bear market and an economic bust. A lot of speculation has been wrung-out of the stock market in parallel with the plunge in the pace of new money creation, but there remains some doubt as to whether or not the economic boom is over.

Just to recap, a boom is a surge in economic activity, involving both consumption and investing, in response to price signals caused by monetary inflation. It fosters the impression that great economic progress is being made, but most of the apparent gains achieved during the boom will prove to be ephemeral because the underlying price signals are false/misleading. It will turn out that there are insufficient resources (labour and materials) to complete projects and/or that resources cost a lot more than planned and/or that the consumption forecasts upon which business additions/expansions were based were far too optimistic. The realisation, stemming from rising costs and lower-than-forecast cash flows, that many of the investments made during the boom years were ill-conceived sets in motion the bust phase of the cycle. During the bust phase, boom-time investments get liquidated.

The economic bust will be ‘explained’ by Keynesians* as a collapse in aggregate demand stemming from a mysterious collapse in confidence (“animal spirits”) and will prompt policies aimed at creating a new boom (a new batch of false price signals upon which future investing mistakes will be based), thus perpetuating the cycle.

As mentioned above, there remains some doubt as to whether or not the latest US economic boom is over. Some indicators say it is, while others are yet to confirm. Also, although the monetary inflation rate has crashed from its February-2021 high, the following monthly chart shows that it is still slightly above the boom-bust threshold of 6%**.

We defined the threshold based on the historical record, in that over the past few decades a boom-to-bust transition for the US economy didn’t begin until after the monetary inflation rate dropped below 6%. However, due to the structural damage to the economy resulting from the Fed’s manipulations of money and interest rates over many decades and especially over the past decade, it’s possible that a bust will begin with the monetary inflation rate at a higher level than in the past.

In any case, the monetary inflation rate should never be used for timing purposes. There are other measures, such as credit spreads, that signal when the monetary inflation rate has risen far enough to set in motion a boom or fallen far enough to set in motion a bust. These measures suggest that the US economy is now in the early part of a bust, although the evidence is not yet conclusive.

*All senior central bankers and most politicians are Keynesians.

**Due to tough year-over-year comparisons, we thought that the US monetary inflation rate (the year-over-year rate of growth of the True Money Supply) would drop below 6% during the first two months of this year. The reason it didn’t is that more than $800B was added to the money supply over the course of those months. The 2-month money-supply surge to begin 2022 was due to a reduction in the Fed’s reverse repo program (this put about $300B back into circulation), an increase in commercial bank credit (this created about $240B of new money), Fed monetisation of securities (this created about $150B of new money) and, we suspect, the flight of some money to the US to escape the troubles in Europe.

[This blog post is an excerpt from a recent commentary published at TSI]

Gold is inherently a stronger currency than the US$. This is because the total supply of gold increases by about 1.5% every year, whereas the total supply of US dollars seldom grows at a rate of less than 4% per year and periodically experiences double-digit annual percentage growth. As a result, the US stock market should peak in gold terms well before it peaks in US$ terms, which is exactly what has happened in the past.

The following weekly chart shows the S&P500 Index in gold terms since 1980. With regard to the past 25 years, the two peaks that stand out on this chart occurred in September-2018 and July-1999. In the first case, the peak in the SPX/gold ratio preceded the SPX’s nominal dollar peak by about 16 months (the SPX didn’t peak in dollar terms until February-2020). In the second case, the peak in the SPX/gold ratio preceded the SPX’s nominal dollar peak by about 8 months (the SPX peaked in dollar terms in March-2000).

The most recent peak in the SPX/gold ratio occurred at the beginning of December-2021. Based on what’s happening on the monetary and economic fronts, we think that this will turn out to be a major top (a top that holds for at least 3 years). At this stage, however, what we have is a pullback to the 200-week MA, which would be consistent with either an intermediate-term correction within an on-going major upward trend or the first leg of a new major downward trend.

The point we want to make today is that even if the decline over the past three months of the SPX/gold ratio was the first leg of a new major downward trend (the most likely scenario, in our opinion), it would not be out of the ordinary for the SPX to make a new all-time high in dollar terms during the second half of this year or the first half of 2023.