GOLD IS OUTPERFORMING BOND PRICES -- THAT INCLUDES ALL BOND CATEGORIES -- GOLD/BOND RATIOS ARE BREAKING OUT TO THE UPSIDE OR ARE CLOSE TO DOING SO -- THAT SUGGESTS THAT INVESTORS ARE BUYING GOLD ASSETS AS A HEDGE AGAINST EXPENSIVE BOND AND STOCK MARKETS
ALL BOND CATEGORIES ARE UNDERFORMING GOLD IN 2017... During the week, I wrote about gold (and gold miners) achieving upside breakouts and outperforming stocks for the first time since 2011. Gold, however, is also doing better than bonds for the first time in six years. Not just some bond categories, but all of them. Chart 1 plots five bond ETFs relative to the price of gold (flat black line) since the start of the year. And all five categories are underperforming the metal. They include long and intermediate term Treasury bonds, investment grade and high yield corporate bonds, and Treasury inflation protected securities (TIPS). And their relative percentage losses are pretty significant. TIPS, for example, are down more than -13% relative to gold. The 7-10 Year Treasury Bond iShares (IEF) have lost more than -11% versus the metal. Investment grade and high yield corporate bonds are lagging behind by -10%. The strongest bond category for the year, which is the 20+Year Treasury Bond iShares (TLT), is down more than -7% against gold. A weak dollar during 2017, low interest rates, and a recent flight to safe havens have benefited both bonds and gold. But investors appear to be favoring gold assets over the safety of bonds.
Chart 1
GOLD/BOND RATIOS ARE RISING ... Chart 2 plots a ratio of gold divided by the 20+Year Treasury Bond iShares (TLT) since the start of the year. The TLT is the strongest bond category for the year with a 2017 gain of 8%. Gold has risen 15% (hence gold's outperformance of 7% shown in Chart 1). That chart shows the ratio surging this week to the highest level since the start of May. Chart 3 is even more impressive. The chart plots a relative strength ratio of gold divided by the 7-10 Year Treasury Bond iShares (IEF). That ETF is more closely tied to the 10-Year Treasury bond yield (but in the opposite direction). The weekly bars in Chart 3 show that ratio rising to the highest level in nearly a year. The stronger gold/IEF ratio is due to the fact that the IEF gained 4% this year, which is half as much as the TLT gain of 8%. Interestingly, gold and bond prices rose during August as safe havens rallied. Gold, however, rose almost twice as much as the strongest bond ETF (TLT), and four times as much as the IEF. Gold miners rose twice as much as the metal. Chart 3 also shows that gold has been outperforming the IEF since the start of 2016.
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Chart 2
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Chart 3
GOLD IS ALSO OUTPERFORMING CORPORATE BONDS... Chart 4 shows a ratio of gold divided by iBoxx Investment Grade Corporate Bond iShares (LQD) nearing a test of its April peak. A decisive close above that barrier would signal a more significant shift toward gold. The same is true of Chart 5 which plots a ratio of gold divided by iBoxx High Yield Corporate iShares (HYG). Both bond categories have gained about 5% this year, putting them -10% behind gold.
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Chart 4
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Chart 5
GOLD IS OUTPACING TIPS... Gold's strongest relative performance is at the expense of Treasury Inflation Protected Securities (TIPS). That's because TIPS are the year's weakest bond ETF with a 2017 gain of only 2%. That makes gold 13% stronger. Chart 6 shows a ratio of gold divided by the TIPS Bond iShares (TIP) rising to the highest level since last September. TIPS have been held back by continued low inflation, which reduces the need for inflation protection. I doubt if gold is being bought for inflation protection. I suspect it's being bought as an alternative to bond prices which are starting to look expensive. Any central bank moves this fall to raise rates or, more likely, start tapering their bond holdings could boost bond yields which would weaken bond prices. That could make gold a safer bet. The fact that gold is doing better than both bonds and stocks this year for the first time in six years also suggests that investors are looking for an alternative to both asset classes. Stocks are in the ninth year of one of the longest bull markets in history. Investors looking to hedge their bets can choose between cash or gold. Cash is safer, but gold assets offer the potential for profit. And, as I suggested earlier in the week, gold miners offer an even stronger alternative than the metal.
