Gold vs DXY - Unusual but not Impossible

Ultimately, the world has the best kind of problem right -- not too much demand. That's the crux of post-covid supply chain problems and the inflation threat. It's been a long time since developed markets have faced an economy that's simply too hot and it's worth remembering that the solutions are relatively simple, but with one big risk.  Commodity currencies pare losses vs USD, while metals push higher after US UMich consumer sentiment hit 10-year lows. Bitcoin added to losses after the SEC rejected VanEck application for the 1st ever Bitcoin Spot ETF. Below is the correlation chart between DXY and gold, highlighting the cycles when both strengthen in tandem. Before Ashraf sheds more detail on it next week, try to distinguish each of those 3 rare cycles on the chart.  But for now, Ashraf urges you to re-read the Gold Comex net long charts and what today's latest release may mean.

It's increasingly well-understood that supply chain bottlenecks outside of chip production aren't due to covid-imposed snags. Rather, they're due to demand for goods that well above pre-covid levels. The shifts in consumption have exposed the lack of spare capacity, particularly in a world of on-time shipping. Combine that with companies running lean inventories and we have a demand shock at a time when consumer balance sheets are in extraordinarily good shape.

Inflation may escalate or it may fall back in the way central bankers outline. If it runs, hiking rates or cutting government spending are relatively easy and well-understood solutions. The threat of a runaway wage-price spiral while central banks remain paralyzed is remote.

In all likelihood, the future will unfold with ongoing strong demand or some level less due to central banks tightening. Some asset prices are undoubtedly high but there's no visible path to an outright reversal.

China is certainly a risk as it continues to try to engineer a soft landing in the property sector but the real global risk is in bonds, which are the greatest bubble in human history. The amount of debt that's trading with a negative nominal or real return is terrifying. This week we've seen volatility in Treasuries rise to the highest since April 2020, including the largest 30-year auction tail in at least 20 years.

So while the unfolding paradigm of better growth, low rates and fiscal largess can keep the party going for years, it will ultimately end. The shape of the reverberations from a doubling or tripling of borrowing rates is tough to see but it's undoubtedly catastrophic.