The Big Divergence Happening Now — Gold Price and Stocks

The Big Divergence Happening Now — Gold Price and Stocks

Mr Market is playing cheeky with us. That’s what I think when it comes to gold stocks. There’s something going on here and I’m not sure what it is exactly.

What gives? Gold remains a belting $2,440 an ounce in Australian dollars.

This is delivering a river of cash flow through the accounts of the producers.

That’s not all…

Historically, the best time to expect a rising gold price is when real interest rates are negative.

And they are — and getting more negative by the day.

But this has created an intriguing divergence that you can see here…

You can see the gold price hasn’t held the recent correlation.

Gold Vs. Real Interest Rate

Source: David Lin

[Click to open in a new window]

And gold stocks can’t find much momentum as a result.

Gold in US dollars remains US$1,800 but without looking threatening to break higher just yet.

Does the market see something I don’t?


However, my expectation is still for this gap to close by gold prices going higher.

I’m happy to wait this divergence out in the meantime because gold margins are good. In general, the Aussie producers carry lots of cash.

That’s a strong base to build from.

But why expect gold prices to go higher anyway?

One reason for that is to do with the ‘plumbing’ of the financial system.

US financial correspondent John Dizard says that the Fed is buying so many US bonds now that it’s creating a shortage of collateral for the wider financial system.

He tells us…

Unfortunately, we now have the conflict of two giant and terrifying programs: “Basel reforms” playing Godzilla and “Fed asset purchases” taking the place of Rodan, the Flying Monster.

The Basel reforms demand the use of government paper to secure transactions.

Fed asset purchases lock that paper up, not only in the form of longer-term balance sheet assets but also as the asset traded for cash through the now trillion-dollar reverse repurchase program.

Fed chairman Jay Powell finally seemed to acknowledge the problem during his recent testimony before the House financial services committee.

Towards the end of his appearance, he muttered like a scientist who realises his experiment has gone very, very wrong, saying:

“You could say there is a shortage of safe short assets…so yeah, that’s why that’s happening, there’s a shortage of T-bills, not a lot of T-bills.”

This all sounds rather arcane and academic.

But plenty of people are pointing at the bond market and reading the falling yields as a sign that the market is pricing in deflation and slowing growth.

It’s clear, from the above, however, that the market signal is distorted through two massive influences — Fed policy and banking regulation.

That is to say, you can’t trust the signal from bond prices.

What you can trust, however, is that Treasury yields are going down at the same time inflation measures are going up.

It looks like a barnstorming environment for gold to flourish to me.

(This is also why the crypto space will likely continue to flourish. People are not fools. They can see the game has become ludicrously rigged under the centralising and money printing power of the central banks. Crypto is the solution to this financial overreach. Make sure you follow my colleagues Ryan Dinse and Greg Canavan on this counter-revolution.)

However, I’m beginning to wonder how wary we need to be of gold miners in Western Australia.

I don’t say that lightly.

But the shortage of workers and COVID restrictions, while understandable, makes it harder for them to hit their production targets and cost guidance.

I’m still happy to go along for now…but I might jump ship at further trouble…and geographically diversify away for my last trade. I’ll keep you posted on that theme.

We are now approaching the earnings results for the stocks across the market.

The market reaction will probably be more important than the results themselves.

For example, how many companies balk at providing guidance for the upcoming year considering the lockdowns and Delta variant running around?

We’ll see. But we’ll get a very good idea, I think, on how bullish the market is once we start to see some of these numbers and forecasts come out.

Stay tuned to your Daily Reckoning Australia!


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Callum Newman,
Editor, The Daily Reckoning Australia

PS: Discover what is probably the easiest way to start investing in gold in Australia. In fact, it’s as easy as buying a book on Amazon! Click here to read the FREE report.