The Most Important Price in the World
This morning, walking along the beach in Naples, my mind turned to what is going on in the gold market. That is always worth discussing, because in my view the gold price is the most important price in the world. I know I differ here with Stan Druckenmiller, who thinks the ten-year yield is the most important price in the world. Time will tell.
My reasoning is inspired by the Sherlock Holmes story “Silver Blaze.” Holmes cracks the case through a fact everyone else misses, the dog that didn’t bark. A horse is stolen in the night, and the dog that was always barking did not bark at all. The absence of something expected was itself the key insight.
Gold Rocketing in An Environment That Should Be Toxic
So here is what I find remarkable in today’s gold market. Tech equities have generally been very strong, and there are higher real interest rates globally. Think back to the first commodity cycle I traded in the early 2000s. It was exactly the opposite. When tech was strong, nobody needed gold. When real interest rates were strong, nobody needed gold. Then – gold went down every day. Not now.
Now, in the same conditions, gold rallies.
Real interest rates keep grinding higher. Tech is still performing well. Yet this pesky gold price just won’t die.
Strength in the gold price is the dog that didn’t bark.
From an investment standpoint, that anomaly is where my full attention lies.
What Happens If the Setup Improves?
So, take the anomaly one step further. What if we found ourselves in a market where tech didn’t work every day, and where real interest rates came down, maybe because the government didn’t want them going higher and tried to peg rates or intervene to drive real yields down? What would gold do in an environment like that? I remember what it did during the last cycle, after real interest rates peaked and turned down and tech began its decade long stretch of underperformance. Gold put on a remarkable run. Could that happen again?
That is what fascinates me right now. Gold is already putting on a pretty remarkable show in an environment that ought to be absolutely toxic to it. I won’t reiterate the long argument I have made over many years, in many forms, for the value of gold as a portfolio diversifier, particularly in times of great change. But the dollar is not weak, tech has been strong, real rates are high and rising, and gold is just fine, thank you very much.
Watch this space.
