The following chart, we propose, has the potential to inspire a whole new way of looking at the gold and Treasury market:
In the month since "Capping..." was posted I haven't had the numbers run to see how robust Goldman's correlation is but even without that information I thought the piece was worth stashing in the link-vault.
It comes from Goldman’s latest research on gold and reflects the recent breakdown in the relationship between the 10-yr Treasury Inflation-Protected Securities real yield and the gold price. Importantly, it was also accompanied by a downside amendment to Goldman’s gold price forecast...MUCH MORE
"And why is that?" gentle reader may ask warily.
Because having the gold price trade between price points established from TIPS prices sounds like the gold market ca. 1890! La belle Époque!
The "fixed" exchange rate ($4.86/£) was was allowed to float up and down in a very tight range determined by interest rates, shipping fees, commissions and even wear of the bullion against canvas bags, resulting in a flow of the metal between New York and London and vice versa.
Look at this quote she pulls from a Krugman post dating to 2011:
...Crucially, at least for tractability, there is a “choke price” — a price at which flow demand goes to zero. As we’ll see next, this price helps tie down the price path. So what determines the price of gold at any given point in time?...How can one look at that and not think "Gold point arbitrage"?
You have to go to the master, Professor Officer (take that Herr Prof. Dr. Dr.) for the whole scoopage:
Cambridge: Cambridge University Press, 1996, 342 pp.
but one of these days I'll get around to posting on this perfect little arb where J.P. Morgan was willing to accept a measly $1000 profit per $1,000,000 traded because it was an honest-to-goodness arbitrage, not some "hedge", for, as we chant each morning, (all together now) "The only perfect hedge is at Sissinghurst":
From Barron's Stocks to Watch blog:
HSBC Lowers Gold Forecast, Credit Suisse More Cautious
...HSBC isn’t the only place that’s turned slightly negative on gold; also today, analysts at Credit Suisse issued a more skeptical note:...MORE
“The 12-year-old US dollar gold bull market is not yet dead in our opinion but nor is it in the best of health,” says Credit Suisse analyst Tom Kendall. “The gold cycle is likely to peak this year.”These are really just guesses, of course, but with stocks rising and lots of data pointing to an improving economy, they may be evidence of a shift in Wall Street attitudes.
He expects gold to average $1,740/oz in 2013–a 4% increase from 2012–before pointing lower, to $1,720 in 2014 and $1,500 the following year.
By the way, the Alphaville article was posted five days before the recent $1715 high in Kitco spot.
Here's another guy who figured the gold trade out:
"Early Gold Arbitrage"
