#42 S2N: The Gold Standard

Today’s Spotlight

I am sure you are reading and hearing all about gold in the media, as well as from your family and friends. As you can see in our performance table below, gold and silver are having a spectacular month. Let us learn a little bit about this asset.

We start with a little bit of history. In 1944, in the wake of World War II, the US dollar became the world’s reserve currency following an important meeting by 44 countries in Bretton Woods, New Hampshire. The US dollar was fixed at an exchange rate of $35 per ounce. This incredible privilege to the United States eventually became unsustainable, with the dollar becoming extremely overvalued as other major countries recovered from World War II. This led to countries leaving the system, forcing President Nixon in August 1971 to abandon what became known as the gold standard.

As you can see in the chart above, it is a nice-looking upward-sloping chart currently making new all-time highs. We can see that gold grew tremendously during the 1970s, a period of high inflation, and then went into a drawdown for close to 30 years. Below is a table with some stats that will make you look like an expert.

I also thought it would be useful to look at a comparison of gold and silver, another asset regarded as a store of wealth. Sadly, if you invested in silver in 1980, you would still be in a drawdown 44 years later. I am not so sure this is the kind of asset I can invest in. Having said that, the first silver coins came into issue around 600 BCE, so what is a 44-year drawdown in the scheme of things?

S2N Observations

You can see that bonds had a shocking day yesterday; see the 10-year bond chart in the gallery below. Yields at 4.63% are edging closer and closer to that 5% mark.

What many might have missed is that Reverse Repo Operations market had a significant amount of liquidity withdrawn yesterday. It dropped to $327 billion, continuing on its trend to zero. However, there have been a lot of comments from FOMC members to slow down the pace of QT. I am watching this and the bond market very closely.

Another clue in this puzzle is the strength of the dollar. Take a look in the chart gallery below; it is also heading towards 52-week highs.

Part of the same dollar story is the weakening Japanese yen. It has broken through the 1.52 level that the BOJ suggested was a line in the sand. I am looking forward to reading about the next George Soros, who broke or is breaking the bank of Japan.

In summary, I think the gold trend has plenty of room to grow. I also think we are likely to see more US dollar strength, which is a bit unusual because gold is often a substitute for dollar weakness. The reason I think the dollar will continue to strengthen is because of the rising bond yields.

Performance Review

To learn a bit more about the Z-Score, which I use for the colour signals, read this blog post.

Chart Gallery

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