Renewed interest in yield alternatives is likely upon us as global interest rates hit new 2019 lows this past week. The last time we saw a surge in google searches for yield alternatives was in late March when US Treasuries sank below 2.4%. With yields continuing their fall, investors are poised to look for bullion market expertise as they consider whether now is a good time to buy gold or silver. Why? Renewed stock market volatility driven by an escalating trade war and the resultant flight to safety into global sovereign bonds has continued to shrink the yield differential (both current and expected future) between US Treasuries and precious metals. Thursday’s stock/bond market action was an acute reminder of these dynamics – German 10YR bond yields are NEGATIVE 12bps for heaven’s sake. While we feel that we are getting close to the lower bounds for German Bund yields, the spread with US Treasuries is re-approaching the lows for 2019 and interest in yield alternatives could increase further if that spread continues to tighten. Remember, this directional change in US Treasury – German Bund spreads that started in November 2018 is one of our reasons for advocating investor alert.
US Equities: US Equities posted their second straight week of declines with the S&P falling 1.2%. The bulk of those declines were logged during Thursday’s session as trade war rhetoric continued its aggressive path and economic data disappointed domestically. Sowing the seeds of this negative market sentiment earlier in the week, Steve Mnuchin indicated that the next round of trade negotiations were “undecided”. In addition, the South China Morning Post reported that China was considering reducing purchases of natural gas from the United States. On Thursday, the spokesperson for China’s Ministry of Commerce, said that the United States needs to “adjust its wrong actions” in order to resume trade talks. As if that wasn’t bad enough, economic data was weak. US May PMI results 1) missed expectations and 2) were barely expansionary with a composite reading of 50.9. Also, Eurozone manufacturing data released Thursday showed a continued contraction. While the VIX ended slightly lower for the week, the index spiked on Thursday in conjunction with the market decline. Overall levels, however, remain below long-term averages likely due to the perception of a Powell put.
Government Bonds: You already know that government bond yields hit their 2019 lows this week and that US Treasury – German Bund spreads are re-approaching their March lows. This is why we believe the search for yield alternatives will pick up steam over the near term. But what about the yield curve? Alarm bells went off in late March when the yield curve inverted between 3-month T-bills and 10-year Treasury Notes. While the yield curve had inverted between 2s and 10s back in December of 2018, an inversion between the 3-month and 10-year portion of the curve has historically been the preferred leading recession indicator. This week saw a return to inversion in this part of the curve. In fact, 1-month T-bills ended the week with a higher yield than 10-year Treasury notes. As noted previously, these inversions typically precede market peaks by an average of 1-2 years.
US Dollar: The rise in the dollar index paused briefly this week, posting a 0.4% decline. We believe that “global synchronized dovishness” currently renders central bank policy a net neutral to FX. However, weaker than expected US economic data drove US Treasury – German Bund spreads to their tightest levels of 2019 while German 10 Year bund yields turned increasing negative. This ultimately gave the Euro a boost vs. the dollar which is by far the biggest component of the dollar index. Looking a bit further under the hood, the yen continued to benefit from its trade war safe haven status. The pound, on the other hand, underperformed (albeit still strengthening slightly vss the dollar) as Theresa May announced her resignation as Prime Minister and the fate of Brexit continued to hang in the balance. Outside of the dollar index, while slightly weaker vs. the Chinese yuan this week, the dollar continues to hold onto most of its gains made since mid-April – see last week’s Market Update. We continue to monitor this FX pair for clues about the status of trade negotiations.
Gold: As measured by the LBMA afternoon fix, gold prices finished the week slightly higher. Price weakness early in the week was quickly replaced with a Thursday rebound as equity market volatility drove flight to safety investing. To buy gold and silver, investors must consider a host of factors including but not limited to market volatility, global bond yields, and dollar strength/weakness. Over the last several months, we have highlighted the tug of war between the receding need for flight to safety assets offset by the shrinking future perceived yield differential between US Treasuries and the precious metal. Not previously highlighted but also in play has been role of US dollar strength in keeping a lid on precious metal prices. Any seasoned investor knows that trying to time the market is extremely difficult and matters less to an investment that will be held for a long period of time. While an investment in gold has historically been associated with negative carry, Precious Yield offers investors in gold the opportunity to add gold holdings to their list of viable yield alternatives. And if you are a long-term holder, turning gold as an asset for diversification purposes into an alternative investment with Precious Yield allows for some cushion against gold price movements. To learn more, please browse our website or contact us for more information. See you next week!
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About the Author
Rob Perry is an avid student of the markets and an aspiring tennis player. He is currently Chief Strategist for Precious Yield as well as Chief Investment Officer of Pecan, a single-family office based in San Diego, CA. Most recently, he was located in New York City working as Chief Strategist of and a Portfolio Manager for Kingsland Capital, a multi-billion dollar boutique asset management firm focused on below-investment grade corporate credit.
Precious Yield, a subsidiary of Kilo Capital, offers long term precious metal investors the unique ability to safely own gold, silver, and platinum and enhance their total returns by earning a yield on these metal balances. Precious Yield deposits are always 100% backed by physical metal. The physical metal balances are regularly verified by EY, one of the largest global accounting firms. Over time, the benefit of earning interest on gold, silver, or platinum balances can meaningfully improve an investor’s returns.
Kilo Capital is a specialty finance and trading company that provides tailored financing solutions and risk mitigation tools for companies who work, trade, deal or invest in precious metals. Our team of experienced precious metals professionals structure the right combination of loans, metal leases, select inventory finance, and hedging services so that our clients achieve their business goals. We work extensively with jewelry manufacturers and wholesalers, coin dealers, metal refiners, other industrial users of precious metals and investors in gold, silver, and platinum.
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At Kilo we apply our deep understanding of the businesses active in jewelry wholesale, metal refining, scrap aggregation, coin and investment bar dealing, and other precious metal businesses to help with the unique challenges precious metals present. We offer highly specialized lending solutions including precious metals loans, leases, and select inventory finance to companies that use precious metals. Our lending solutions are structured such that your metal price exposure is fully hedged. As a result, you can focus on what really matters – running your business.
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