CEO, ByteTree Asset Management

ByteTree Asset Management

Specialising in Bitcoin, Gold and Digital Assets

Investment Manager specialising in bitcoin, gold and digital assets

Cross Asset Strategy

<ul><li>Over the past year, what was good for the US dollar was bad for the stockmarket.</li><li>The world’s reserve currency lubricates (or seizes up) financial markets.</li><li>A weak dollar is bullish, and a strong dollar, bearish. The dollar was strong (the euro weak) until September, and that put downward pressure on stocks. </li></ul>

Over the past year, what was good for the US dollar was bad for the stockmarket.The world’s reserve currency lubricates (or seizes up) financial markets.A weak dollar is bullish, and a strong dollar, bearish. The dollar was strong (the euro weak) until September, and that put downward pressure on stocks. 

Crypto

<p>In the <a href="https://bytetreeam.us3.list-manage.com/track/click?u=a4a4461fba9ee073aaefd6019&amp;id=dcb8d40d7c&amp;e=7c019babf2" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://bytetreeam.us3.list-manage.com/track/click?u%3Da4a4461fba9ee073aaefd6019%26id%3Ddcb8d40d7c%26e%3D7c019babf2&amp;source=gmail&amp;ust=1673308168769000&amp;usg=AOvVaw2CNffZpfuUEwz0HL_LZFxk" rel="noopener">latest issue</a>&nbsp;of the&nbsp;AAA Report, Robin and Rashpal did what they do every month. They dusted off their model, cranked the handle, gave a salute, and then scribbled down the results. Despite being clever people, they don’t have to use much brain power to update their model; that came many years ago when they first built it.&nbsp;<br><br>Trend-following, momentum investing, CTAs (trend-following funds), relative strength, price relative, and leadership are all terms that embrace the idea that the trend is your friend. Over the long-term, this is unquestionably true – and here’s why.<br><br>Rashpal showed this chart of stockmarket returns by year, which neatly fit inside a bell curve most of the time. The average year has been 11.8%, with most years returning between 10% and 20%. However, there is nothing average about stockmarkets, as they routinely do either much better - or much worse.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/318/980/original/image_20186909421673221878127.png?1673221880" class="editor-image img-responsive" data-smartkarma-image-id="318980"></figure>
<p>Notice how the best years don’t beat the bell on the right side, but on the left side, the worst years have often been worse than the bell suggests they should be.&nbsp;<br><br>What is happening? Most of the time, the bell curve works because things are normal – where normal is a good thing. That can be a modest loss, or a sizeable gain, but we call that normal. What is abnormal are heavy losses, which are a fact of life, but we don’t like them. When things go wrong in markets, they can go really wrong, and this happens more often than we think it should. Hence, the good times are “normal” and live inside the bell, while the bad times are “abnormal” and frequently ring the bell.&nbsp;<br><br>Rashpal cranked the handle to see what the AAA model has done since 1999. Despite some nasty years, such as:</p>
<ul>
<li>2000: Dotcom crash</li>
<li>2001: Dotcom crash</li>
<li>2002: Dotcom crash</li>
<li>2008: Credit crisis</li>
<li>2011: Europe crisis</li>
<li>2015: China crisis</li>
<li>2016: Brexit</li>
<li>2020: Covid crisis</li>
<li>2022: Everything bubble</li>
</ul>
<p>…it came out remarkably well. Notice how the AAA portfolio has a “right skew”, whereas the market has a “left skew”.&nbsp;</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/318/981/original/image_6590691231673221942034.png?1673221943" class="editor-image img-responsive" data-smartkarma-image-id="318981"></figure>
<p>More proof that markets are anything but “normal”.&nbsp;</p>
<p>Trend-following can lose money, and despite it being a winning strategy over the long term, it requires discipline in implementation. It isn’t for everyone.<br><br>When Rashpal cranks the handle at the end of each month, he is looking for the strongest trends. By definition, the strongest trends have already risen in price and, more importantly, are beating (or leading) the market. Most of the time, these strong trends carry on for much longer than we would normally expect. Recall how the US tech sector was a license to print money from 2009 until 2021. That’s 12 years, and in the 1980s and 90s, it was even stronger – and for longer. But beware of the hangovers.</p>
<h3>Identify the Leading Trends&nbsp;</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/318/982/original/image_147437741673221966270.png?1673221967" class="editor-image img-responsive" data-smartkarma-image-id="318982"></figure>
<div class="content-remarks">
<p style="text-align: center;">Source: Bloomberg</p>
</div>
<p style="text-align: left;">That illustrates the power of identifying a great trend and hanging on, but not all trends behave that well. Some immediately reverse the day after you turn that handle, and it is currently a choppy time for trend-following in equities, which I can demonstrate.&nbsp;<br><br>The leaders versus the losers (strongest trends compared to the weakest trends in equities) are shown below. The chart rises over time, which shows that trend-following works in the long run. But in years like 2009, you get a momentum crash when the trends go into reverse, and doing the opposite is a better strategy (i.e. buying the losers and selling the winners).</p>
<h3>Momentum and Momentum Crashes</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/318/983/original/image_68075892251673222003882.png?1673222005" class="editor-image img-responsive" data-smartkarma-image-id="318983"></figure>
<div class="content-remarks">
<p style="text-align: center;">Source: Bloomberg</p>
</div>
<p style="text-align: left;">We had an equity momentum crash in late 2020 on the first reopening after lockdown. Then momentum reinvented itself with energy, defense and tobacco last year, and has become as extended as it was in 2008. That doesn’t mean the stockmarket will crash – indeed, it could mean it goes up, just as it did in 2009. But be in no doubt that it is telling us to be wary of mature equity trends until the dust settles. Trend-following has had a great run. &nbsp;<br><br>In my&nbsp;Multi-Asset Investor&nbsp;Letter, I am a huge fan of trend-following strategies but also try and forecast momentum crashes – which isn’t an easy thing to do. Currently, the strategy assumes an equity momentum crash is underway. We are avoiding old trends in favour of new trends accompanied by value. It’s doing well.<br><br>The AAA is not at risk from the full force of an equity momentum crash because it has a multi-asset class remit. It embraces bonds and commodities, which is great because bonds have already blown up, which makes them 100x safer than they were a year ago – although not necessarily yet safe.&nbsp;<br><br>In the latest issue, the AAA Team embraced corporate bonds and commodities. Of their four holdings, with 25% in each, only one is in equity, and a choice far away from the US equity bubble. The AAA strategy is a step ahead.</p>
<p style="text-align: left;">Being multi-asset will hold it in better stead than being a pure equity-only momentum strategy. You can buy an ETF that does that (somewhat well but dilutes it too much). I highlight the iShares World Momentum ETF (IWMO $ or IWFM £), and while it had a great 2020 and 2021, it is now under pressure.</p>
<h3>Equity Momentum Has Had a Good Run</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/318/984/original/image_88403812661673222044435.png?1673222046" class="editor-image img-responsive" data-smartkarma-image-id="318984"></figure>
<div class="content-remarks">
<p style="text-align: center;">Source:&nbsp;<a href="https://bytetreeam.us3.list-manage.com/track/click?u=a4a4461fba9ee073aaefd6019&amp;id=b4e926d6be&amp;e=7c019babf2" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://bytetreeam.us3.list-manage.com/track/click?u%3Da4a4461fba9ee073aaefd6019%26id%3Db4e926d6be%26e%3D7c019babf2&amp;source=gmail&amp;ust=1673308168769000&amp;usg=AOvVaw0lNGrE548WjBpNKSStGQeT" rel="noopener">ByteTree Terminal</a></p>
</div>
<p style="text-align: left;">I have no doubt the AAA will have a spectacular decade, but it may have a few choppy months, or even a year. But those that follow the model, through thick and thin, will be pleased they did.<br><br>The AAA is an excellent investment process, but it isn’t for everyone. I would urge readers to fully understand it before they take the leap.&nbsp;<br><br>Trend-following is important at ByteTree, and that’s why we built ByteTrend, which is a simple way of screening 100 cryptos, 600 equity ETFs, and a bunch of commodities. We will be adding currencies, and possibly US-listed ETFs if there is demand, along with countries, sectors, and themes.&nbsp;<br><br>We can measure market strength using our breadth charts. The strong trends (navy blue) are few and have seen declining peaks for the past two years. That said, there are fewer weak trends (red skies), which implies stability. This is a powerful tool for keeping an eye on market strength.</p>
<h3>Not Many Positive Trends in Equity ETFs</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/318/985/original/image_89303918571673222089267.png?1673222091" class="editor-image img-responsive" data-smartkarma-image-id="318985"></figure>
<div class="content-remarks">
<p style="text-align: center;">Source:&nbsp;<a href="https://bytetreeam.us3.list-manage.com/track/click?u=a4a4461fba9ee073aaefd6019&amp;id=ecda9b2ffc&amp;e=7c019babf2" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://bytetreeam.us3.list-manage.com/track/click?u%3Da4a4461fba9ee073aaefd6019%26id%3Decda9b2ffc%26e%3D7c019babf2&amp;source=gmail&amp;ust=1673308168769000&amp;usg=AOvVaw2XsIs88l2n3rkp1SmMXYQa" rel="noopener">ByteTree Terminal</a></p>
</div>
<p style="text-align: left;">It is worth noting that most equity ETFs include US stocks, and that explains the recent dip, as US equities have been weak in recent months. Yet, the lack of blue perhaps understates the opportunities elsewhere because most ETFs by quantity are US-centric.<br><br>Here’s an example that isn’t much talked about- Malaysia. It has been lagging the world since 2011. Now it’s a leader. Get used to this.</p>
<h3>Malaysia the Winner</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/318/986/original/image_6947113181673222129669.png?1673222131" class="editor-image img-responsive" data-smartkarma-image-id="318986"></figure>
<div class="content-remarks">
<p style="text-align: center;">Source:&nbsp;<a href="https://bytetreeam.us3.list-manage.com/track/click?u=a4a4461fba9ee073aaefd6019&amp;id=dc1bc15dda&amp;e=7c019babf2" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://bytetreeam.us3.list-manage.com/track/click?u%3Da4a4461fba9ee073aaefd6019%26id%3Ddc1bc15dda%26e%3D7c019babf2&amp;source=gmail&amp;ust=1673308168769000&amp;usg=AOvVaw0xluFWxGGyKc5-0C5i4mlb" rel="noopener">ByteTree Terminal</a></p>
</div>
<p style="text-align: left;">Contrast that with US Real Estate, which is melting before us.&nbsp;</p>
<h3>As Safe as Houses</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/318/987/original/image_76712705991673222155563.png?1673222157" class="editor-image img-responsive" data-smartkarma-image-id="318987"></figure>
<div class="content-remarks">
<p style="text-align: center;">Source:&nbsp;<a href="https://bytetreeam.us3.list-manage.com/track/click?u=a4a4461fba9ee073aaefd6019&amp;id=ae9171268a&amp;e=7c019babf2" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://bytetreeam.us3.list-manage.com/track/click?u%3Da4a4461fba9ee073aaefd6019%26id%3Dae9171268a%26e%3D7c019babf2&amp;source=gmail&amp;ust=1673308168770000&amp;usg=AOvVaw0aRoPlh0TSTKl32UJfBbPg" rel="noopener">ByteTree Terminal</a></p>
</div>
<p style="text-align: left;">In commodities, where Goldman Sachs are forecasting a mega-double-bubble-boom, we see copper turning down. We already have oil and gas in downtrends, but as of last night, the same message was coming through for nickel as well.&nbsp;</p>
<h3>Copper Bottomed</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/318/988/original/image_6736377101673222185661.png?1673222187" class="editor-image img-responsive" data-smartkarma-image-id="318988"></figure>
<div class="content-remarks">
<p style="text-align: center;">Source:&nbsp;<a href="https://bytetreeam.us3.list-manage.com/track/click?u=a4a4461fba9ee073aaefd6019&amp;id=416a5bd851&amp;e=7c019babf2" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://bytetreeam.us3.list-manage.com/track/click?u%3Da4a4461fba9ee073aaefd6019%26id%3D416a5bd851%26e%3D7c019babf2&amp;source=gmail&amp;ust=1673308168770000&amp;usg=AOvVaw0dXZ2ZgrrYaMpcjypXU7AF" rel="noopener">ByteTree Terminal</a></p>
</div>
<p style="text-align: left;">Nickel? You mean the thing we don’t have enough of? Surely to the moon! The trend urges caution. But it goes without saying; trends can change.&nbsp;<br><br>For the crypto bears, who insist it is a pointless Ponzi scheme, the number two token, Ethereum (ETH), is back in an uptrend versus bitcoin. To my mind, ETH is the crypto post office where you go to send assets around the world in a secure manner. It works well, and it may be telling us to prepare for better times ahead.</p>
<h3>Ethereum Leads</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/318/989/original/image_402447895111673222216240.png?1673222217" class="editor-image img-responsive" data-smartkarma-image-id="318989"></figure>
<div class="content-remarks">
<p style="text-align: center;">Source:&nbsp;<a href="https://bytetreeam.us3.list-manage.com/track/click?u=a4a4461fba9ee073aaefd6019&amp;id=b28ea33357&amp;e=7c019babf2" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://bytetreeam.us3.list-manage.com/track/click?u%3Da4a4461fba9ee073aaefd6019%26id%3Db28ea33357%26e%3D7c019babf2&amp;source=gmail&amp;ust=1673308168770000&amp;usg=AOvVaw2yYj5CVuFP2pLDXoVtiWzp" rel="noopener">ByteTree Terminal</a></p>
</div>
<p style="text-align: left;">In a momentum crash environment, the message from the market is that new trends are a much better bet than the old ones. We understand that, and our research communicates it. The AAA is excellent, but before you embrace it, please take the time to understand it.&nbsp;</p>

In the latest issue&nbsp;of the&nbsp;AAA Report, Robin and Rashpal did what they do every month. They dusted off their model, cranked the handle, gave a salute, and then scribbled down the results. Despite being clever people, they don’t have to use much brain power to update their model; that came many years ago when they first built it.&nbsp;  Trend-following, momentum investing, CTAs (trend-following funds), relative strength, price relative, and leadership are all terms that embrace the idea that the trend is your friend. Over the long-term, this is unquestionably true – and here’s why.  Rashpal showed this chart of stockmarket returns by year, which neatly fit inside a bell curve most of the time. The average year has been 11.8%, with most years returning between 10% and 20%. However, there is nothing average about stockmarkets, as they routinely do either much better - or much worse.

Notice how the best years don’t beat the bell on the right side, but on the left side, the worst years have often been worse than the bell suggests they should be.&nbsp;  What is happening? Most of the time, the bell curve works because things are normal – where normal is a good thing. That can be a modest loss, or a sizeable gain, but we call that normal. What is abnormal are heavy losses, which are a fact of life, but we don’t like them. When things go wrong in markets, they can go really wrong, and this happens more often than we think it should. Hence, the good times are “normal” and live inside the bell, while the bad times are “abnormal” and frequently ring the bell.&nbsp;  Rashpal cranked the handle to see what the AAA model has done since 1999. Despite some nasty years, such as:

2000: Dotcom crash
2001: Dotcom crash
2002: Dotcom crash
2008: Credit crisis
2011: Europe crisis
2015: China crisis
2016: Brexit
2020: Covid crisis
2022: Everything bubble

…it came out remarkably well. Notice how the AAA portfolio has a “right skew”, whereas the market has a “left skew”.&nbsp;

More proof that markets are anything but “normal”.&nbsp;
Trend-following can lose money, and despite it being a winning strategy over the long term, it requires discipline in implementation. It isn’t for everyone.  When Rashpal cranks the handle at the end of each month, he is looking for the strongest trends. By definition, the strongest trends have already risen in price and, more importantly, are beating (or leading) the market. Most of the time, these strong trends carry on for much longer than we would normally expect. Recall how the US tech sector was a license to print money from 2009 until 2021. That’s 12 years, and in the 1980s and 90s, it was even stronger – and for longer. But beware of the hangovers.
Identify the Leading Trends&nbsp;


Source: Bloomberg

That illustrates the power of identifying a great trend and hanging on, but not all trends behave that well. Some immediately reverse the day after you turn that handle, and it is currently a choppy time for trend-following in equities, which I can demonstrate.&nbsp;  The leaders versus the losers (strongest trends compared to the weakest trends in equities) are shown below. The chart rises over time, which shows that trend-following works in the long run. But in years like 2009, you get a momentum crash when the trends go into reverse, and doing the opposite is a better strategy (i.e. buying the losers and selling the winners).
Momentum and Momentum Crashes


Source: Bloomberg

We had an equity momentum crash in late 2020 on the first reopening after lockdown. Then momentum reinvented itself with energy, defense and tobacco last year, and has become as extended as it was in 2008. That doesn’t mean the stockmarket will crash – indeed, it could mean it goes up, just as it did in 2009. But be in no doubt that it is telling us to be wary of mature equity trends until the dust settles. Trend-following has had a great run. &nbsp;  In my&nbsp;Multi-Asset Investor&nbsp;Letter, I am a huge fan of trend-following strategies but also try and forecast momentum crashes – which isn’t an easy thing to do. Currently, the strategy assumes an equity momentum crash is underway. We are avoiding old trends in favour of new trends accompanied by value. It’s doing well.  The AAA is not at risk from the full force of an equity momentum crash because it has a multi-asset class remit. It embraces bonds and commodities, which is great because bonds have already blown up, which makes them 100x safer than they were a year ago – although not necessarily yet safe.&nbsp;  In the latest issue, the AAA Team embraced corporate bonds and commodities. Of their four holdings, with 25% in each, only one is in equity, and a choice far away from the US equity bubble. The AAA strategy is a step ahead.
Being multi-asset will hold it in better stead than being a pure equity-only momentum strategy. You can buy an ETF that does that (somewhat well but dilutes it too much). I highlight the iShares World Momentum ETF (IWMO $ or IWFM £), and while it had a great 2020 and 2021, it is now under pressure.
Equity Momentum Has Had a Good Run


Source:&nbsp;ByteTree Terminal

I have no doubt the AAA will have a spectacular decade, but it may have a few choppy months, or even a year. But those that follow the model, through thick and thin, will be pleased they did.  The AAA is an excellent investment process, but it isn’t for everyone. I would urge readers to fully understand it before they take the leap.&nbsp;  Trend-following is important at ByteTree, and that’s why we built ByteTrend, which is a simple way of screening 100 cryptos, 600 equity ETFs, and a bunch of commodities. We will be adding currencies, and possibly US-listed ETFs if there is demand, along with countries, sectors, and themes.&nbsp;  We can measure market strength using our breadth charts. The strong trends (navy blue) are few and have seen declining peaks for the past two years. That said, there are fewer weak trends (red skies), which implies stability. This is a powerful tool for keeping an eye on market strength.
Not Many Positive Trends in Equity ETFs


Source:&nbsp;ByteTree Terminal

It is worth noting that most equity ETFs include US stocks, and that explains the recent dip, as US equities have been weak in recent months. Yet, the lack of blue perhaps understates the opportunities elsewhere because most ETFs by quantity are US-centric.  Here’s an example that isn’t much talked about- Malaysia. It has been lagging the world since 2011. Now it’s a leader. Get used to this.
Malaysia the Winner


Source:&nbsp;ByteTree Terminal

Contrast that with US Real Estate, which is melting before us.&nbsp;
As Safe as Houses


Source:&nbsp;ByteTree Terminal

In commodities, where Goldman Sachs are forecasting a mega-double-bubble-boom, we see copper turning down. We already have oil and gas in downtrends, but as of last night, the same message was coming through for nickel as well.&nbsp;
Copper Bottomed


Source:&nbsp;ByteTree Terminal

Nickel? You mean the thing we don’t have enough of? Surely to the moon! The trend urges caution. But it goes without saying; trends can change.&nbsp;  For the crypto bears, who insist it is a pointless Ponzi scheme, the number two token, Ethereum (ETH), is back in an uptrend versus bitcoin. To my mind, ETH is the crypto post office where you go to send assets around the world in a secure manner. It works well, and it may be telling us to prepare for better times ahead.
Ethereum Leads


Source:&nbsp;ByteTree Terminal

In a momentum crash environment, the message from the market is that new trends are a much better bet than the old ones. We understand that, and our research communicates it. The AAA is excellent, but before you embrace it, please take the time to understand it.&nbsp;

The Power of Trend-Following – and Right Skews

Commodities

<p>The risk facing gold is marginal compared to the risk facing US equities, and it is hard to see a scenario where gold doesn’t win.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/884/original/image_68785922171662595347611.png?1662595349" class="editor-image img-responsive" data-smartkarma-image-id="296884"></figure>
<h3>Highlights</h3>
<ul>
<li><strong>Regime</strong>:&nbsp;Checking in on the bull market</li>
<li><strong>Macro:</strong>&nbsp;Inflation cools, but when will the dollar?</li>
<li><strong>Valuation:</strong>&nbsp;A modest 9% premium for a high quality asset</li>
<li><strong>Flows:</strong>&nbsp;Investors sell gold, central banks buy it</li>
</ul>
<h3>REGIME - GOLD BULL MARKET</h3>
<p>At times like these, best to check in. Historically gold has been a buy when two or more of the following have held true:</p>
<ol>
<li>Short-term real interest rates are below 1.8%.&nbsp;<strong>TRUE</strong></li>
<li>The gold price, measured in a basket of currencies is rising, measured by a 35-month exponential moving average.&nbsp;<strong>TRUE</strong></li>
<li>The gold price relative to the S&amp;P 500, measured by a 35-month exponential.&nbsp;<strong>CLOSE</strong></li>
</ol>
<p>The first rule is well in the money as the current real interest rate (Fed interest rate 3% less last CPI 8.5%) is deeply negative. Historically a reading below 1.8% has tended to be onside for the gold price.</p>
<h3>Cheap money</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/885/original/image_29946325481662595424508.png?1662595426" class="editor-image img-responsive" data-smartkarma-image-id="296885"></figure>
<div class="content-caption">Source: Bloomberg</div>
<p>But that is backward looking. It matters more where interest rates and inflation will be in the future, rather than where they are today or have been in the past. On that basis, looking just two years ahead, we never saw real rates at -9% or even -6%, but at -3% (black line, below). That forward-looking number has already surged to +1.2%, which is where things have broken in the past.</p>
<h3>Why the US dollar has surged</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/886/original/image_45849756191662595453455.png?1662595455" class="editor-image img-responsive" data-smartkarma-image-id="296886"></figure>
<div class="content-caption">Source: Bloomberg</div>
<p>The Fed want to see positive real rates across the curve, which was one of their objectives, and they’ve already achieved it. How much is enough?<br><br>The financial markets understand this, but the media will focus heavily on the next CPI data next Tuesday. In that sense, the risk of an overshoot becomes political as the last time they said inflation was transitory, it wasn’t. The Fed are keen to restore their credibility.<br><br>The dollar is rising on the back of this tightening party, while all other currencies slump. One day this will reverse, because it always does. Gold is struggling in US/Singapore/Canadian/Aussie dollars and maybe Swiss Francs and Yuan too but is flying in the other 100 or so currencies around the world. I would say 90% of the world’s population is experiencing a gold bull market in their home currency.</p>
<h3>Gold is strong by most measures</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/892/original/image_478025229101662595510770.png?1662595512" class="editor-image img-responsive" data-smartkarma-image-id="296892"></figure>
<div class="content-caption">Source: Bloomberg</div>
<p>Next, we come to the relative performance against the stockmarket. Since 2018, gold is still marginally ahead of the S&amp;P 500, but you’d hardly call it a trend.</p>
<h3>Gold neutral versus US equities</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/893/original/image_960886356111662595540998.png?1662595542" class="editor-image img-responsive" data-smartkarma-image-id="296893"></figure>
<div class="content-caption">Source: Bloomberg</div>
<p>Yet when viewed against the world ex-US, it’s a different story. The outperformance against the EAFE Index (Europe, Australia and the Far East) is strong, and very much what I’d call a trend.</p>
<h3>Gold strong versus the world ex-US</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/894/original/image_788996490121662595569627.png?1662595571" class="editor-image img-responsive" data-smartkarma-image-id="296894"></figure>
<div class="content-caption">Source: Bloomberg</div>
<p>The trouble with US equities, which are nearly keeping up with gold, is that they are stretched to the limits. While gold is close to fair value, US equities are rich on most measures, especially against bonds.</p>
<h3>S&amp;P Returns vs US 30-year bonds</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/895/original/image_406273165131662595595992.png?1662595597" class="editor-image img-responsive" data-smartkarma-image-id="296895"></figure>
<div class="content-caption">Source: Bloomberg</div>
<p>As the bond yield continues to rise, the downward pressure on US equities bites as they become extended. The move since March 2020 is one for the record books.</p>
<p>The risk facing gold is marginal compared to the risk facing US equities, and it is hard to see a scenario where gold doesn’t win.</p>
<h2>MACRO</h2>
<p>Looking across the ocean, inflation expectations have collapsed in the UK too. This is all very recent and so a bit early to congratulate our new prime minister, Liz Truss, but it’s there for the eye to see.</p>
<h3>UK inflation expectations retreat from panic levels</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/896/original/image_14171199141662595635204.png?1662595637" class="editor-image img-responsive" data-smartkarma-image-id="296896"></figure>
<div class="content-caption">Source: Bloomberg</div>
<p>That’s also true in France.</p>
<h3>Also seen in France</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/897/original/image_272949410151662595672166.png?1662595674" class="editor-image img-responsive" data-smartkarma-image-id="296897"></figure>
<div class="content-caption">Source: Bloomberg</div>
<p>How can this be in the midst of a cost-of-living crisis? The main culprit in Europe has been the rising cost of natural gas, up 210% over the past year. Oil is 30% higher while gold, silver and copper are lower.</p>
<h3>Energy beats metals</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/898/original/image_290900762161662595701088.png?1662595703" class="editor-image img-responsive" data-smartkarma-image-id="296898"></figure>
<div class="content-caption">Source: Bloomberg</div>
<p>If you start the chart a month later, in October, the picture looks very different. Gas is now up 44%, oil 13% and the metals slightly negative. This is what the bond market is discounting. Last year was terrible, and while prices won’t necessarily fall, they won’t surge either. Looking ahead, the view is far more stable than in the rear-view mirror. It is the rate of change that inflation is measuring. High prices have already been discounted.</p>
<h3>Inflation softens when you strip out last September</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/899/original/image_311151534171662595726626.png?1662595728" class="editor-image img-responsive" data-smartkarma-image-id="296899"></figure>
<div class="content-caption">Source: Bloomberg</div>
<h2>VALUATION</h2>
<p>Gold takes all of this into its stride. Using my tried and tested valuation model, gold is trading at a modest 9% premium to fair value.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/900/original/image_110016238181662595754963.png?1662595756" class="editor-image img-responsive" data-smartkarma-image-id="296900"></figure>
<div class="content-caption">Source:&nbsp;<a href="https://terminal.bytetree.com/gold/valuation" target="_blank" rel="noopener">ByteTree Terminal</a>.&nbsp;ByteTree Gold Fair Value (green) and price (blue), since 2018.</div>
<p>I would prefer a discount, but 9% isn’t much, and no cause to sell.</p>
<p>The model prices gold off 20-year US real rates (red) because it is a dollar-based model. They have risen a great deal, as seen earlier. Moving from -0.9% to +0.9% is the largest upswing we’ve seen this century. Because gold was 15% undervalued before this move, the pain has been moderate in comparison to other asset classes.</p>
<h3>Rates rise + inflation cools = real rates surge</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/901/original/image_836270513191662595781742.png?1662595783" class="editor-image img-responsive" data-smartkarma-image-id="296901"></figure>
<div class="content-caption">Source: Bloomberg</div>
<p>The bullish point here is that ALL the great gold rallies in this century started from a peak in real rates, as shown. The level could go higher than the current 0.9%, but that was enough to shake financial markets in 2018. The high in 2007 marked the beginning of the financial crisis, and the peak in 2008 marked the market low in the thick of a deflation shock.</p>
<h3>The great rallies started from a high in real rates</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/902/original/image_810498120201662595808870.png?1662595810" class="editor-image img-responsive" data-smartkarma-image-id="296902"></figure>
<div class="content-caption">Source: Bloomberg</div>
<p>Given how an overshoot has worked out in the past, we have to be close to a peak. But the future is uncertain, and here are a few scenarios.</p>
<h3>Gold valuation scenarios (present highlighted)</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/903/original/image_836724020211662595840517.png?1662595842" class="editor-image img-responsive" data-smartkarma-image-id="296903"></figure>
<h3>For the bears</h3>
<p>If we returned to rates in 2000, with inflation at 2% and the bond yield at 6%, gold would slump to around $801. The 2007 scenario sees inflation at 2.5% with a bond yield at 5%. Then expect gold to touch $1,181.</p>
<h3>For the bulls</h3>
<p>We soon see a peak in the bond yield at 3.5%, which is not far away from where we already are, but long-term inflation expectations fail to return to 2%. Instead, they rise to 3% and suddenly, gold trades at $1,931. This bullish scenario seems likely because the world has changed.</p>
<p>If 3.5% inflation moves up to 4%, gold trades at $2,861 before you know it.</p>
<h2>FLOWS</h2>
<p>Asset allocators clearly don’t read Atlas Pulse because they’d find something else to sell other than gold if they did. Fund holdings have dropped 8 million ounces. Don’t worry, they’re collectively behind the curve, and you can guarantee they’ll be back.</p>
<h3>Gold investor outflows persist</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/904/original/image_878766891221662595866529.png?1662595868" class="editor-image img-responsive" data-smartkarma-image-id="296904"></figure>
<div class="content-caption">Source:&nbsp;<a href="https://terminal.bytetree.com/gold/valuation" target="_blank" rel="noopener">ByteTree Terminal</a>.&nbsp;Gold held by funds (oz, in green) and price (USD, in blue), since 2015.</div>
<p>But someone is buying their gold, and it’s the central banks, who have been net buyers every quarter bar one since 2013. Which quarter? They sold in Q3 2020, right at the top of the market.</p>
<h3>Don’t bet against the central banks</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/296/905/original/image_935132366231662595896495.png?1662595898" class="editor-image img-responsive" data-smartkarma-image-id="296905"></figure>
<div class="content-caption">Source: Bloomberg</div>
<h2>SUMMARY</h2>
<p>There are easy times to invest in, and there are hard times. These times are most definitely hard. Yet gold is inexpensive, and macro settings are now consistent with levels from where the price has performed well in the past. Gold also has a long history of preserving value in times of political crisis. In a world that is becoming increasingly divided, it is the timeless store of value we can all agree on.</p>

The risk facing gold is marginal compared to the risk facing US equities, and it is hard to see a scenario where gold doesn’t win.

Highlights

Regime:&nbsp;Checking in on the bull market
Macro:&nbsp;Inflation cools, but when will the dollar?
Valuation:&nbsp;A modest 9% premium for a high quality asset
Flows:&nbsp;Investors sell gold, central banks buy it

REGIME - GOLD BULL MARKET
At times like these, best to check in. Historically gold has been a buy when two or more of the following have held true:

Short-term real interest rates are below 1.8%.&nbsp;TRUE
The gold price, measured in a basket of currencies is rising, measured by a 35-month exponential moving average.&nbsp;TRUE
The gold price relative to the S&amp;P 500, measured by a 35-month exponential.&nbsp;CLOSE

The first rule is well in the money as the current real interest rate (Fed interest rate 3% less last CPI 8.5%) is deeply negative. Historically a reading below 1.8% has tended to be onside for the gold price.
Cheap money

Source: Bloomberg
But that is backward looking. It matters more where interest rates and inflation will be in the future, rather than where they are today or have been in the past. On that basis, looking just two years ahead, we never saw real rates at -9% or even -6%, but at -3% (black line, below). That forward-looking number has already surged to +1.2%, which is where things have broken in the past.
Why the US dollar has surged

Source: Bloomberg
The Fed want to see positive real rates across the curve, which was one of their objectives, and they’ve already achieved it. How much is enough?  The financial markets understand this, but the media will focus heavily on the next CPI data next Tuesday. In that sense, the risk of an overshoot becomes political as the last time they said inflation was transitory, it wasn’t. The Fed are keen to restore their credibility.  The dollar is rising on the back of this tightening party, while all other currencies slump. One day this will reverse, because it always does. Gold is struggling in US/Singapore/Canadian/Aussie dollars and maybe Swiss Francs and Yuan too but is flying in the other 100 or so currencies around the world. I would say 90% of the world’s population is experiencing a gold bull market in their home currency.
Gold is strong by most measures

Source: Bloomberg
Next, we come to the relative performance against the stockmarket. Since 2018, gold is still marginally ahead of the S&amp;P 500, but you’d hardly call it a trend.
Gold neutral versus US equities

Source: Bloomberg
Yet when viewed against the world ex-US, it’s a different story. The outperformance against the EAFE Index (Europe, Australia and the Far East) is strong, and very much what I’d call a trend.
Gold strong versus the world ex-US

Source: Bloomberg
The trouble with US equities, which are nearly keeping up with gold, is that they are stretched to the limits. While gold is close to fair value, US equities are rich on most measures, especially against bonds.
S&amp;P Returns vs US 30-year bonds

Source: Bloomberg
As the bond yield continues to rise, the downward pressure on US equities bites as they become extended. The move since March 2020 is one for the record books.
The risk facing gold is marginal compared to the risk facing US equities, and it is hard to see a scenario where gold doesn’t win.
MACRO
Looking across the ocean, inflation expectations have collapsed in the UK too. This is all very recent and so a bit early to congratulate our new prime minister, Liz Truss, but it’s there for the eye to see.
UK inflation expectations retreat from panic levels

Source: Bloomberg
That’s also true in France.
Also seen in France

Source: Bloomberg
How can this be in the midst of a cost-of-living crisis? The main culprit in Europe has been the rising cost of natural gas, up 210% over the past year. Oil is 30% higher while gold, silver and copper are lower.
Energy beats metals

Source: Bloomberg
If you start the chart a month later, in October, the picture looks very different. Gas is now up 44%, oil 13% and the metals slightly negative. This is what the bond market is discounting. Last year was terrible, and while prices won’t necessarily fall, they won’t surge either. Looking ahead, the view is far more stable than in the rear-view mirror. It is the rate of change that inflation is measuring. High prices have already been discounted.
Inflation softens when you strip out last September

Source: Bloomberg
VALUATION
Gold takes all of this into its stride. Using my tried and tested valuation model, gold is trading at a modest 9% premium to fair value.

Source:&nbsp;ByteTree Terminal.&nbsp;ByteTree Gold Fair Value (green) and price (blue), since 2018.
I would prefer a discount, but 9% isn’t much, and no cause to sell.
The model prices gold off 20-year US real rates (red) because it is a dollar-based model. They have risen a great deal, as seen earlier. Moving from -0.9% to +0.9% is the largest upswing we’ve seen this century. Because gold was 15% undervalued before this move, the pain has been moderate in comparison to other asset classes.
Rates rise + inflation cools = real rates surge

Source: Bloomberg
The bullish point here is that ALL the great gold rallies in this century started from a peak in real rates, as shown. The level could go higher than the current 0.9%, but that was enough to shake financial markets in 2018. The high in 2007 marked the beginning of the financial crisis, and the peak in 2008 marked the market low in the thick of a deflation shock.
The great rallies started from a high in real rates

Source: Bloomberg
Given how an overshoot has worked out in the past, we have to be close to a peak. But the future is uncertain, and here are a few scenarios.
Gold valuation scenarios (present highlighted)

For the bears
If we returned to rates in 2000, with inflation at 2% and the bond yield at 6%, gold would slump to around $801. The 2007 scenario sees inflation at 2.5% with a bond yield at 5%. Then expect gold to touch $1,181.
For the bulls
We soon see a peak in the bond yield at 3.5%, which is not far away from where we already are, but long-term inflation expectations fail to return to 2%. Instead, they rise to 3% and suddenly, gold trades at $1,931. This bullish scenario seems likely because the world has changed.
If 3.5% inflation moves up to 4%, gold trades at $2,861 before you know it.
FLOWS
Asset allocators clearly don’t read Atlas Pulse because they’d find something else to sell other than gold if they did. Fund holdings have dropped 8 million ounces. Don’t worry, they’re collectively behind the curve, and you can guarantee they’ll be back.
Gold investor outflows persist

Source:&nbsp;ByteTree Terminal.&nbsp;Gold held by funds (oz, in green) and price (USD, in blue), since 2015.
But someone is buying their gold, and it’s the central banks, who have been net buyers every quarter bar one since 2013. Which quarter? They sold in Q3 2020, right at the top of the market.
Don’t bet against the central banks

Source: Bloomberg
SUMMARY
There are easy times to invest in, and there are hard times. These times are most definitely hard. Yet gold is inexpensive, and macro settings are now consistent with levels from where the price has performed well in the past. Gold also has a long history of preserving value in times of political crisis. In a world that is becoming increasingly divided, it is the timeless store of value we can all agree on.

When Real Rates Have Been This High, the Winner Is Gold

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