What a time to be alive as a trader – professional or passive – in this market and economy. A yield curve inversion without a recession, trillions in negative-yielding bonds, trade wars, and triple-digit losses one day and triple-digit gains the next. Indeed, you can tell your grandkids that you survived the turmoil, and all you got for it was a -0.25% Swedish note and a steep discount on Kraft Heinz stock. Do you know what you also are witnessing? The formation of a new tag team: gold and the US dollar.
Tag-Team Champions
Have you been paying attention to the market as of late? If not, you probably should, even without any skin in the game.
Year-to-date, gold prices have advanced around 20%, topping $1,500 for the first time in six years. At the same time, the US dollar has surged 3% against a basket of currencies to 99.00, which is the best level in more than two years. For anyone who has toured with the bears and bulls in financial markets over the years, the simultaneous ascent is an incredible but rare event, much like a shooting star or a solar eclipse.
With trade uncertainty, market volatility, and panic in the streets of Recession City, gold’s meteoric performance in 2019 has been understandable. Gold is the premier safe-haven asset, whether the world is on the brink of nuclear holocaust courtesy of Dr. Strangelove or full-blown economic collapse.
But what about the buck? The strengthening dollar is a bit more of a quagmire, considering the Federal Reserve’s renewed easing, the US government’s dismissal of fiscal conservatism, a cooldown in the world’s biggest economy, and an impeachment inquiry hanging over the president’s head. Despite all these factors, the buck has been hovering around the 95-97 mark in recent years.
Some contend that the US Dollar Index is an outdated measurement of the buck. So, even if you were to utilize the Broad Trade-Weighted Dollar Index, which gauges trade volumes and includes emerging-markets currencies, it is just short of an all-time high.
Now, the performance of the dollar is not pleasing the White House, though a strong-dollar policy has been the official stance for more than 20 years. Plus, a powerful dollar is good for Americans because it increases your purchasing power, makes imports cheaper, and attracts investment. But President Trump is encouraging the Federal Reserve to mirror other central banks by indirectly diminishing the foreign exchange rate.
The Eccles Building could introduce ZIRP or NIRP, relaunch quantitative easing, and drop off bags of money from helicopters, and investors would still hold dollars and clamor for US Treasuries. In any other market, this would drive away investors. But then again, this is not like any market we have witnessed before, maybe only comparable to the dot-com bubble.
So, why is the market acting like a bigamist and having an affair with both gold and the dollar? The rest of the world has gone mad, like Dr. Viktor Frankenstein.
Around the Markets in 80 Days
Like the yield curve inversion, an unconventional monetary policy employed by central banks across the globe has distorted this usual trade.
Typically, the Fed’s rate cuts have sent the dollar lower, driving up the value of gold. However, since the fed funds rate (the interest rate at which banks lend money to each other) is no longer the primary factor for what inflates or suppresses the dollar’s adventures, we are witnessing a shift in conventional thinking. It should also be noted that the Fed is slashing the fed funds rate while the European Central Bank (ECB) is expanding QE with subzero interest rates. This means that the differential still favors the dollar.
The next thing is to travel around the world in 80 days. Central banks and governments are executing supposedly clever monetary and fiscal policy nostrums to spur a modicum of economic growth, including negative-yielding bonds, which has metastasized into a $13 trillion market. Although investors can make money if these bonds travel higher, many traders are not taking that bet, choosing to put their money in US government debt. And, since there is such a huge demand for Treasuries, Washington does not need to increase the interest, which is good news for taxpayers – for now. Put simply, investors are taking 2% over negative (smart move!).
The gold-dollar inversion is explained by using one descriptor: chaos. In any other market, an event like the US-China trade war would send the dollar cratering. But where would investors go? Nobody is really giving anyone shelter. The eurozone is a lost cause, Japan is on the brink of a recession, everyone understands the downturn occurring in Beijing, and slumps are transpiring in many pockets of the developed world. The centuries-old safe haven, Switzerland, is trying to stop the franc’s skyrocketing valuation, so even if you wanted to feel the Bern, you couldn’t for much longer.
It turns out that the gold-dollar synchronization is due to investors hedging all their bets and parking their money in two safe havens.
Sniffing Around
Is it time to ditch that Stock Market for Dummies you just purchased at the used bookstore for a buck? Well, not quite, but you should know that trading in this market is like the famous scene in Chinatown when Roman Polanski’s character says to Jack Nicholson: “You're a very nosy fellow, kitty cat. Huh? You know what happens to nosy fellows? Huh? No? Wanna guess? Huh? No? Okay. They lose their noses. …. Next time you lose the whole thing. Cut it off and feed it to my goldfish.”
First, it is a deep wound in your nose as you sniff around a chaotic equities market. Then, before you know it, the whole thing is gone, leaving you sidelined and wondering, “What just happened?” Indeed, up is down and down is up; gold is rising and so is the US dollar. Bid adieu to conventions and welcome this new combination. Give up, it’s ZIRP, NIRP, GDX, and USD town.
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