Founder & Chief Market Strategist - SAV Markets, SAV Markets

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

Technical Analysis

A note sent on 26 October titled <a href="https://www.smartkarma.com/insights/the-renewed-case-for-gold" target="_blank" data-smartkarma-citation="insights:59584" rel="noopener">The Renewed Case for Gold</a> concluded with the following:“The price action on Gold itself is looking increasingly bullish. Watch the $1,834 level closely as a close above there would be a serious development given we have failed there on numerous occasions this year. The more important medium term level is $1,916.”That remains the case as we finished last week at $1,817. So why is this note titled “Have you seen the break on Gold?”. The answer lies in how one measures the Gold price. It can be measured against any currency (usually the USD) and better still, if we want a proper picture, it can be measured against a basket of currencies which is what the first chart below does. This is where we see the bullish break …

A note sent on 26 October titled The Renewed Case for Gold concluded with the following:“The price action on Gold itself is looking increasingly bullish. Watch the $1,834 level closely as a close above there would be a serious development given we have failed there on numerous occasions this year. The more important medium term level is $1,916.”That remains the case as we finished last week at $1,817. So why is this note titled “Have you seen the break on Gold?”. The answer lies in how one measures the Gold price. It can be measured against any currency (usually the USD) and better still, if we want a proper picture, it can be measured against a basket of currencies which is what the first chart below does. This is where we see the bullish break …

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

All the inflation gauges in the US are far above the Fed's 2% inflation target. Headline CPI inflation is at a 13-year high of 5.4% YoY, headline PCE inflation at a 30-year high of 4.4% YoY, and the GDP deflator was up 5.7% QoQsaar in 3Q 2021; the Fed's preferred gauge, the core PCE deflator was up 3.6% YoY in July-August 2021, while the core CPI inflation rate was 4% YoY in September. The reason for the inflation surge is something that we have been predicting since last year -- the excessively rapid increase in money supply (M2), which was up 13% YoY in September 2021, on top of the 24% YoY rise a year ago; it is increasingly clear that the Fed effectively has a M2-growth target of 11-13% YoY, which it has maintained since April 2021. (As we keep stressing, this is much faster than M2 growth in 2009-10, which peaked at 11% YoY because the money-multiplier was depressed at a time when banks were choosing to hold large excess reserves). See our June 2020 insight <a href="https://www.smartkarma.com/insights/labour-market-slack-remains-but-fomc-will-need-to-tighten-by-mid-2021" target="_blank" data-smartkarma-citation="insights:40185" rel="noopener">Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021.</a>The ECB's rapidly-shrinking credibility took a massive further hit when the first read on October 2021 inflation showed CPI (HICP) inflation at 4.1% YoY -- after the ECB's policy council chose to keep policy unchanged, stating that its analysis after "a lot of soul-searching" about "inflation, inflation, inflation" had led it to conclude that there was no basis for the market's expectations of even a minuscule rate hike in 2022. The ECB formally targets headline (not core) inflation, and with average inflation in Jan-Oct 2021 already above that (and more than double that target in October 2021), it is ludicrous for the ECB to still be pursuing its PEPP, even at a moderately slower pace. The likely outcome will be near-term appreciation of the Euro -- and sharp unexpected tightening in the Eurozone over the next half year. We would recommend being Underweight Europe, but particularly Italy, Greece, Cyprus and Spain. Near-term Euro strength will likely give way to a strong dollar by March 2022, as the Eurozone faces a new debt crisis with the tightening of monetary conditions in the Eurozone.

All the inflation gauges in the US are far above the Fed's 2% inflation target. Headline CPI inflation is at a 13-year high of 5.4% YoY, headline PCE inflation at a 30-year high of 4.4% YoY, and the GDP deflator was up 5.7% QoQsaar in 3Q 2021; the Fed's preferred gauge, the core PCE deflator was up 3.6% YoY in July-August 2021, while the core CPI inflation rate was 4% YoY in September. The reason for the inflation surge is something that we have been predicting since last year -- the excessively rapid increase in money supply (M2), which was up 13% YoY in September 2021, on top of the 24% YoY rise a year ago; it is increasingly clear that the Fed effectively has a M2-growth target of 11-13% YoY, which it has maintained since April 2021. (As we keep stressing, this is much faster than M2 growth in 2009-10, which peaked at 11% YoY because the money-multiplier was depressed at a time when banks were choosing to hold large excess reserves). See our June 2020 insight Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021.The ECB's rapidly-shrinking credibility took a massive further hit when the first read on October 2021 inflation showed CPI (HICP) inflation at 4.1% YoY -- after the ECB's policy council chose to keep policy unchanged, stating that its analysis after "a lot of soul-searching" about "inflation, inflation, inflation" had led it to conclude that there was no basis for the market's expectations of even a minuscule rate hike in 2022. The ECB formally targets headline (not core) inflation, and with average inflation in Jan-Oct 2021 already above that (and more than double that target in October 2021), it is ludicrous for the ECB to still be pursuing its PEPP, even at a moderately slower pace. The likely outcome will be near-term appreciation of the Euro -- and sharp unexpected tightening in the Eurozone over the next half year. We would recommend being Underweight Europe, but particularly Italy, Greece, Cyprus and Spain. Near-term Euro strength will likely give way to a strong dollar by March 2022, as the Eurozone faces a new debt crisis with the tightening of monetary conditions in the Eurozone.  

Inflation Is Entrenched, and Central Bank Credibility Is Sinking, Especially the ECB's

Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

A month ago, I recommended hedging broad EM currency exposure with the euro. In this note, I first evaluate how well the hedge worked and then address the question of whether to continue to hold the hedge or not. I demonstrate that the hedge has been very effective based on the hedged returns and I also recommend continuing to hold on to the hedge as risks remain on the horizon.Separately, the attached file is a snapshot of the EM currency market in which I seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

A month ago, I recommended hedging broad EM currency exposure with the euro. In this note, I first evaluate how well the hedge worked and then address the question of whether to continue to hold the hedge or not. I demonstrate that the hedge has been very effective based on the hedged returns and I also recommend continuing to hold on to the hedge as risks remain on the horizon.Separately, the attached file is a snapshot of the EM currency market in which I seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

How Effective Has the Euro Hedge Been for EM FX?

The overnight rise in bond prices has confirmed a short-term break.
It suggests that we may effectively see a repeat of the past 4 sessions – a sharp rise in the Long Bond and a quick fall in long end yields (30Y).
At this juncture it appears to be a short term adjustments in markets rather than anything more concerning.
However, as breakevens remain elevated, real yields are likely to make fresh all-time lows. As highlighted earlier this week, watch out for a breach of support on US 30Y TIPS yields at minus 50 bps. The all-time low on US 10Y TIPS yield was minus 122 bps and is back in sight.
With this in mind, and when coupled with the slip in Bictoin and a still vulnerable looking USD, we must prepare for the possibility of a breakout in Gold through $1,834.

The overnight rise in bond prices has confirmed a short-term break.
It suggests that we may effectively see a repeat of the past 4 sessions – a sharp rise in the Long Bond and a quick fall in long end yields (30Y).
At this juncture it appears to be a short term adjustments in markets rather than anything more concerning.
However, as breakevens remain elevated, real yields are likely to make fresh all-time lows. As highlighted earlier this week, watch out for a breach of support on US 30Y TIPS yields at minus 50 bps. The all-time low on US 10Y TIPS yield was minus 122 bps and is back in sight.
With this in mind, and when coupled with the slip in Bictoin and a still vulnerable looking USD, we must prepare for the possibility of a breakout in Gold through $1,834.

Cross Asset Strategy

Over the past year Gold bugs have not had it easy. While it was a brilliant performer for much of 2020, it is still negative so far this year.A few reasons explain this lack of performance. Firstly, yields have had a two-way street, both nominal and, more importantly, real yields. Yields were initially up at the beginning of the year and then generally down since March. Secondly, there has not been a clear trend on the USD – something that Gold has typically been inversely correlated to. The USD has spent as much time this year rising as it has falling and, depending on how it is measured, it is effectively unchanged to marginally up. The third reason is the emergence of Bitcoin as a viable alternative or addition to other hard assets. Whether one agrees or disagrees about Bitcoin being a serious so called ‘hard’ asset, it is increasingly being seen as such, which has played its role in taking some of the shine off Gold. However, are we approaching an interesting juncture in all three of these corners? We can all see that inflation has started to rise and serious questions are being raised about whether higher prices are short lived &amp; transitory or longer lasting. As a consequence, breakevens have risen faster than nominal yields thus leaving key benchmarks of ‘real’ yields deeper in negative territory. That is beginning to be bullish for Gold again.At the same time, the bounce in the USD has started to lose momentum and there are some signs that it may trend down, at least in some corners. Asian markets look particularly attractive as the continent makes its way forward to some form of normality – something that North America and Europe had already started to do much earlier. For those who may not be familiar, as an example, the environment in which I sit in Singapore still requires one to wear a mask, be in a group of no more than 2, not talk on the train and, enjoy one’s outing without music in venues such as restaurants, bars, cafes etc. There is a long way to go for normality to return to many parts of Asia but it is approaching and as it does, the demand which has been pent up for 2 years will start to show its various colours. Thus, the ADXY Index looks bullish. If anything, a lower USD would support Gold.Finally, there is the strange market of the bitcoin. It doubled, then halved, then doubled again all in the space of 10 months. It is now a market truly driven by feelings and sentiments. Interesting it might be then that the recent high was when the much-anticipated futures ETFs went live last week. So far (and it is very early) it appears to look like a classic “buy the rumour, sell the fact” scenario. What needs to be seen is whether that will be short lived or longer. A slowdown in the rally, a consolidation or a move down in bitcoin would likely be a bullish sign for Gold.Below we look at the price action and setups on all these markets, which should be watched closely while building either a case for, or against, the real hard asset that is Gold.We start with an index that attempts to encompass all three components - real yields, the USD, &amp; Bitcoin…

Over the past year Gold bugs have not had it easy. While it was a brilliant performer for much of 2020, it is still negative so far this year.A few reasons explain this lack of performance. Firstly, yields have had a two-way street, both nominal and, more importantly, real yields. Yields were initially up at the beginning of the year and then generally down since March. Secondly, there has not been a clear trend on the USD – something that Gold has typically been inversely correlated to. The USD has spent as much time this year rising as it has falling and, depending on how it is measured, it is effectively unchanged to marginally up. The third reason is the emergence of Bitcoin as a viable alternative or addition to other hard assets. Whether one agrees or disagrees about Bitcoin being a serious so called ‘hard’ asset, it is increasingly being seen as such, which has played its role in taking some of the shine off Gold. However, are we approaching an interesting juncture in all three of these corners? We can all see that inflation has started to rise and serious questions are being raised about whether higher prices are short lived &amp; transitory or longer lasting. As a consequence, breakevens have risen faster than nominal yields thus leaving key benchmarks of ‘real’ yields deeper in negative territory. That is beginning to be bullish for Gold again.At the same time, the bounce in the USD has started to lose momentum and there are some signs that it may trend down, at least in some corners. Asian markets look particularly attractive as the continent makes its way forward to some form of normality – something that North America and Europe had already started to do much earlier. For those who may not be familiar, as an example, the environment in which I sit in Singapore still requires one to wear a mask, be in a group of no more than 2, not talk on the train and, enjoy one’s outing without music in venues such as restaurants, bars, cafes etc. There is a long way to go for normality to return to many parts of Asia but it is approaching and as it does, the demand which has been pent up for 2 years will start to show its various colours. Thus, the ADXY Index looks bullish. If anything, a lower USD would support Gold.Finally, there is the strange market of the bitcoin. It doubled, then halved, then doubled again all in the space of 10 months. It is now a market truly driven by feelings and sentiments. Interesting it might be then that the recent high was when the much-anticipated futures ETFs went live last week. So far (and it is very early) it appears to look like a classic “buy the rumour, sell the fact” scenario. What needs to be seen is whether that will be short lived or longer. A slowdown in the rally, a consolidation or a move down in bitcoin would likely be a bullish sign for Gold.Below we look at the price action and setups on all these markets, which should be watched closely while building either a case for, or against, the real hard asset that is Gold.We start with an index that attempts to encompass all three components - real yields, the USD, &amp; Bitcoin…

United States

The U.S. Dollar Index(USDX) indicates the general int'l value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. The ICE US computes this by using the rates supplied by some 500 banks. FOR REAL TIME SEE EIS ICEA<GO>.

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Dollar Index (DXY CURNCY)

Have You Seen the Break in Gold?

Gold when measured against the world's 4 largest currencies has already seen a bullish break. Given the price action on the USD Index is looks like...

Shyam Devani

Inflation Is Entrenched, and Central Bank Credibility Is Sinking, Especially the ECB's

ECB retained its PEPP the day before the 4.1% inflation print. US too has overshot inflation targets, but taper guidance is clear. Near-term Euro...

Prasenjit K. Basu

How Effective Has the Euro Hedge Been for EM FX?

In this note, I first evaluate how well has the euro hedge for EM FX that I recommended a month ago worked and then address the question of whether...

Gautam Jain, PhD, CFA

Bond Market Squeeze Is Not Over

The squeeze in the bond market still has more to go. Lower real yields, a vulnerable USD and weakness in Bitcoin should conspire to support Gold

Shyam Devani

The Renewed Case for Gold

The components that seem to impact the Gold price the most are beginning to show signs that we could see higher levels on Gold over the coming weeks.

Shyam Devani

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