Gold Is Still Under Pressure With Growth And Inflation Accelerating
1.) GOLD - I haven't written about gold in a while...mostly because Gold has just not been doing anything. Most people wonder how that can be with a depreciating dollar - not to the extent that the Dollar Index is getting hammered, but because inflation continues to be an issue. So, the narrative goes that if inflation is a problem, gold is the place to be. Well, not in the macro set up of growth (GDP) and inflation (CPI) accelerating at the same time, like they have been. These kinds of economic conditions are generally the worst for Gold. And that has been displayed by what Gold has been doing. Gold is down -2.3% in the last month and -6.83% so far this year. It's bearish condition likely remains until the accelerations in both growth and inflation subside. We are not buyers here and all of our models are flat gold. That said, $3970 will be an important level for gold.
2.) DOLLAR - The US Dollar continues to hold above its breakout level from last month. Who cares, right? I mean inflation is problematic, so what does the dollar doing even matter anymore!? Good question. It matters because it is still one of THE largest macro drivers in the game. The US Dollar and interest rates, are the biggies. So, when the dollar has an upward bias, we want to know what is positively or negatively correlated with it, because it could act as a headwind or a tailwind. Right now, the S&P 500 has a 0.59 positive correlation on a short term 15 day basis while Oil has a -0.51 correlation on that same duration. Gold has a -0.73 negative correlation with the Dollar on a 30 day basis...another reason Gold has fallen and just can't get up.
3.) HEDGED - Slowly, but surely, the S&P 500 constituents have been "healing" under the surface of price. That can be seen by looking at what percentage of stocks are above or below various moving price averages. Right now 69% of S&P 500 stocks are above their 20 day moving average, and 58% are above the 50 and 200 day moving averages. This suggests that over half of the index is still trending in a bullish or upward bias. Additionally, the S&P 500 proxy (SPY) is trading at a 72% implied volatility (IV) premium versus realized volatility. This is an over-simplification, but a positive IV premium is consistent with (and largely caused by) net demand from put buyers/hedgers or those wanting downside protection. Option buyers are structurally the “insurance buyers,” and the premium is the price of that insurance. So why does a larger implied volatility premium matter? Because market mechanics show that those puts that have been bought will at some point need to be "unwound". When investors buy puts on SPY/SPX for hedging, Dealers (market makers) are typically the other side → they end up short (sellers of) those puts. Those same dealers sell futures against those short puts to stay neutral. When those puts are unwound, the Dealers buy back the futures they previously sold to hedge. So an implied volatility premium gives us some clues as to the degree of market hedging and also an indication that there is some "buying power" underneath the market. Aren't market mechanics fun?!
