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Macro

Put Gold Miners Back On Your Radar


We utilize advanced quantitative tools where insight is now easily gleaned into the main drivers of pricing in specific assets. As a result, we can work on facts rather than subjective opinion. This is important when it comes to gold because of the emotion historically associated with the shiny metal.

We believe there are seven tangible factors that are at least occasionally credited with driving the gold price:

  1. Central bank liquidity, defined as the real 10-year US Treasury yield;
  2. The US dollar, defined as the DXY index;
  3. Market volatility/system fears, defined as the VIX index;
  4. Central bank gold demand, defined via IMF data on central bank gold holdings;
  5. The performance of similar commodities, defined as the S&P GSCI Industrial metals index;
  6. Inflation or deflation, defined as the deviation of the year-on-year change in US CPI from 2.5%;
  7. The economic growth outlook, defined as the deviation of the US ISM survey from 50.

We acknowledge that this list is far from exhaustive, and the latest quantitative tools miss important factors like Indian jewelry demand and Chinese retail buying. Also, lately, some of the economic mechanics of gold have been compared to those of cryptocurrencies. For example, they are both scarce, fungible and do not come attached to debt. However, the historical data required to analyze these factors to a statistically significant degree is simply not available, and we can keep these drivers in mind when it comes time to consider the future of gold.

Currently, our advanced quantitative toolkit shows that gold is most sensitive to the following factors in this order of importance:

  1. Real US interest rates
  2. Low equity market volatility/system fears
  3. The performance of commodities in general

Of all factors that are credited with driving the gold price currently, US real interest rates have the most explanatory power. For example, the rolling correlation of gold relative to real interest rates is at the highest point of this cycle. Therefore, tell us if real interest rates will go up or down and we will tell you the direction of the price of gold.

So, the question is whether today’s FOMC meeting will lead to higher or lower real interest rates go?

The reason this is a relevant question now is on account of seasonality. As you can see, the last two December FOMC hikes marked a short-term high in US real interest rates, and by extension a low in gold.

Also, for 12 straight years, the 5yr US Treasury real yield has fallen in January. For us, we are not sure why should it be any different in year 13? Worded differently, if the sky was blue for twelve days in a row, why won’t it still be blue on the thirteenth day?

The key point here is that if the seasonal pattern holds, that suggests one potential outcome is the March FOMC interest rate hike probabilities are too high.

Here is the linkage of lower real interest rates and higher gold prices to gold miners.

Buying the VanEck Vectors Gold Miners ETF (symbol: GDX) in December during this gold bear market has paid off:

Here is what this table looks like on a chart:

Here is a seasonality chart of GDX over the last four years.

Collectively, this helps explain the bid-tone today in GDX.

 

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Macro

Update - Crude Oil


Overnight, data in China showed crude oil imports rebounded from a one-year low to near a record amid signs the nation’s commercial stockpiles shrank by the most in almost eight years.

For all the concern expressed by those who sell blood for a living, at the time of this writing, WTI crude oil is trading higher than where it closed Thursday of last week, the day of the OPEC meeting. In addition, Brent implied volatility returned to its lowest level in more than 3 years today.

We believe it is difficult to call that a “sell-the-news” event, or make a case that the charts were broken earlier this week on poor gasoline inventory data.

Also, following President Trump’s announcement regarding moving the US capital in Israel to Jerusalem earlier this week should keep the Middle East geopolitical risk premium elevated, at least for the first weekend that follows the announcement.

To be fair, and something that would provide more comfort to longs, it is important that the barrel settles at these prices today on a “weekly” basis.

Let’s see what the Rig Count data show this afternoon.

 

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Macro

Update - European Financial Strength


This morning, the EURO STOXX Banks Index (SX7E) is +3%, having its strongest up-day since July.

The catalyst was a break in a six-month deadlock regarding the global financial regulator – Basel Committee – final batch of post-crisis capital rules.

Specifically, the Basel Committee on Banking Supervision's compromise will cause “no significant increase” in overall capital requirements. Put another way, few lenders will need to raise major new capital.

Another way to think about this beyond less potential share dilution in the sector is that some big banks will likely see their capital demands now decline. As a result, some banks with excess capital can potentially begin to buy back their shares or increase their dividends.

While this will not result in the same type of regulatory overhang removal underway in the United States, the step forward today for Basel III is noteworthy because it has been plaguing European financials for years.

 

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Macro

Long Oil & Gas vs. Short Metals & Mining


Observation – European Equities – Long Oil & Gas vs. Short Metals & Mining

 

Potentially one of the most basic relative value expressions in the world is long European Oil & Gas (SXEP) vs. Short Metals & Mining (SXPP).

Detail is not required at this point, only simplistic macro variables are.

Long Oil & Gas is simply a value play on the repair process in crude oil.

Short Metal & Mining simply embraces the global monetary policy tightening cycle, Chinese deleveraging and the end of a residential construction cycle.

The ratio of SXEP/SXPP broke the 200-day moving average this week.

 

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Macro

Crude Oil & Energy Stocks


For us, there were two key takeaways from last Thursday’s OPEC meeting:

  1. Despite the extreme long positioning in crude oil futures contracts, investors did not “sell the news.” Prices have traded steady, or range bound since the meeting.
  2. The most acute response to OPEC extending production cuts to the end of 2018 was in the related equities.

Today, we are focused on the second takeaway.

Energy equities can be broken down into the following segments: integrated, oil services, exploration & production (E&P), and Master Limited Partnerships (MLP).

The midstream segment, or MLP’s, is the best barometer for fear and greed because they are predominantly held by retail investors seeking high income. One of the most frightening charts in the market is the Alerian MLP Index (AMZ), the main benchmark for MLP’s.

Last Thursday, the Alerian MLP ETF (AMLP) closed +4.75% and traded the most volume in history – 47,816,498 million shares relative to the six-month average of 9,938,670 shares. Worded differently, the weakest segment of the energy market – i.e., midstream – showed the strongest response to OPEC.

We view the response in MLP’s that coincided with the OPEC meeting as an inflection point. Here is what this signal means to us regarding broader energy:

 

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Disclosures

We appreciate your feedback. If you have any questions or comments about IB Traders' Insight please contact ibti@ibkr.com.

The material (including articles and commentary) provided on IB Traders' Insight is offered for informational purposes only. The posted material is NOT a recommendation by Interactive Brokers (IB) that you or your clients should contract for the services of or invest with any of the independent advisors or hedge funds or others who may post on IB Traders' Insight or invest with any advisors or hedge funds. The advisors, hedge funds and other analysts who may post on IB Traders' Insight are independent of IB and IB does not make any representations or warranties concerning the past or future performance of these advisors, hedge funds and others or the accuracy of the information they provide. Interactive Brokers does not conduct a "suitability review" to make sure the trading of any advisor or hedge fund or other party is suitable for you.

Securities or other financial instruments mentioned in the material posted are not suitable for all investors. The material posted does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before making any investment or trade, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Past performance is no guarantee of future results.

Any information provided by third parties has been obtained from sources believed to be reliable and accurate; however, IB does not warrant its accuracy and assumes no responsibility for any errors or omissions.

Any information posted by employees of IB or an affiliated company is based upon information that is believed to be reliable. However, neither IB nor its affiliates warrant its completeness, accuracy or adequacy. IB does not make any representations or warranties concerning the past or future performance of any financial instrument. By posting material on IB Traders' Insight, IB is not representing that any particular financial instrument or trading strategy is appropriate for you.