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Had we had the chance yesterday, we would have penned something about a couple of sharpish counter-trend moves in long-term bull markets that might have been a bit painful for some. As it happens, both bonds and gold were to bounce by the end of the day and thus offer us the opportunity to warn of the dangers of getting "whipsawed" .... which of course is much easier to do with the benefit of hindsight.
Of all the definitions of being whipsawed, NASDAQ's glossary of terms gives us probably the simplest but also the pithiest. Being NASDAQ, they refer to stocks but we can widen it to any market we like . Being whipsawed is "buying just before prices fall and selling just before prices rise in a volatile market ..... " . Any active trader who has been in the markets for any length of time and says that they don't know what that feels like is probably not to be trusted. But then again, it's the kind of unpleasant experience that is much more likely to be encountered by those active short-term traders and not by the longer-term trend followers that are such a powerful force in markets today.
Talking of trends, the long-term bull trend in bond markets, especially US Treasuries, is more than 30 years old and can be considered the mother and father of them all. The action over the last 36 hours or so means very little in the wider scheme of things, but certainly would have done if you got the wrong side of a day-trade for example (and were whipsawed), and may point to something we should all bear in mind.
Bond prices and bond yields move in opposite directions of course, so the bull market in prices equates to a downtrend in yields. On Monday, the yield on 10yr US Treasuries was knocking along at 1.66% but overnight bond investors got something of a shock from Japan .... and it had nothing to do with the Rugby World Cup. Japan's 10yr government bond auction on Tuesday was the most poorly received in over three years (and they've had plenty of them). The suggestion is that the Bank of Japan will alter the profile of its bond purchases in order to steepen the yield curve .... in other words, buy less at the long-end compared to shorter maturities. They may also target more of their purchases at equity ETFs. Perhaps more importantly, the massive Government Pension Investment Funds announced that they are looking to put more of its money into foreign bond markets. The knock to bond markets (and spike in yields) spilled into other global bond markets. US 10yr Treasury yields jumped to just shy of 1.76%.
BUT ..... and here's where the whipsaw comes in ..... some truly grotty US manufacturing numbers yesterday turned things around in an instant, and those yields have traded below 1.62% this morning. The whole episode may soon be forgotten. With global growth stalling, and government bond markets the classic safe-haven in times of anxiety (and geopolitically and otherwise there's plenty to be anxious about), it would be tough to argue that there's much reason to expect an end to the downward trend in yields anytime soon. But if there is a lesson to be learned, and remembered for some point in the future, it's that bond markets will react pretty badly if deprived of the support of central banks (and government pension funds) that they have enjoyed for so long.
And so to Gold, another impressive bull market even if its uptrend has "only" really been going a little over a year. In August 2018, gold hit a low of about $1,173 per oz. By September 4th of this year, the price had risen to $1,555. It was still trading at $1,535 on Sept 24th last week, in spite of the negative effects of a strong dollar (because gold's quoted in dollars). Early yesterday it traded at $1460 .... oh dear, is that it then ? All over for gold ? Er .... perhaps not. By the end of the day gold had traded back up to $1,486 (where it remains today) .... classic whipsaw conditions.
So why the down-move over the last week ? Very likely, the persistent dollar strength finally took its toll, and profit-taking and book-squaring at quarter-end will also have played a part. But the gold market is a very different beast to a monster like bond markets. There are of course many long-term investors in gold, not least central banks, but it would also be fair to say that alongside those buyers of bullion there are also more speculative investors using gold ETFs, futures etc who have a big influence on prices and are more easily shaken out of their positions if the market turns. That's particularly the case if the market positioning reveals that the price is technically "overbought" .... which it definitively has been of late.
So a healthy setback then, or a more fundamental change in outlook ? The former, according to Nolan Watson who thinks that the gold price will hit $2,000 within two years. Since Mr Watson is CEO of Sandstorm Gold you might argue that he would say that, wouldn't he ? But if you consider three of the main drivers of the gold price, he may have a point : strength of the dollar, interest rates and geopolitical concerns / safe-haven demand. The slowing US economy might be expected to put downward pressure on both rates and the value of its currency, and geopolitical concerns are strengthening rather than the opposite : US / China trade , US / Iran and the Middle East, possible Presidential impeachment, Brexit etc etc etc.
The bulls would maintain that all the reasons behind the rally so far are still in place, and with a good chance of the US dollar finally losing some of its appeal their case is even stronger. Who knows ? All one can be relatively confident of is that things will remain pretty volatile, and one will need to take care to avoid getting whipsawed. That's comparatively easy if you got in some while ago, but for new entrants to the market ? Not so much ......