Gold: China Correlations Matter- ZeroHedge
Given the decreased reliability of USD correlations for pricing Gold what financial correlations are stepping into the breach?
Previously posted in Premium: What Governs Gold's Price Now? and shared with friends at ZeroHedge today. Footnotes at bottom
Unlocked: They Want the (Gold) Correlations
Authored by GoldFix ZH Edit
Intro:
Bank analysts and financial media have been wondering aloud why Gold has not been following its “traditional” US financial correlations. Some are warning (again) there will be hell to pay when these correlations return. That may be true in the short term. But consider this: Economic power is moving east. Along with that eastern migration comes pricing power over commodities. As we show below, Traditional correlations (a proxy for economic drivers) are fine if you use the right country1.
Contents:
Gold and Dollar Correlations
Dollar Correlations Are Not Broken
China Correlations Matter
Correlations are Governors
What Governs How Much They Want The Gold?
Goldman’s Trading Desk Notices
Correlations and Unipolarity/Multipolarity
More Charts
1- Gold and Dollar Correlations Still Work
Gold is priced in dollars globally. But gold is being bought in Yuan which is increasingly *not* economically tied to Dollars. Put another (mercantilist) way; As global trade fragments, so does global price. We show below that gold is increasingly a proxy for China’s economy. We also suspect the banks covering the asset will soon start talking about it this way. The correlations are fine, if you know where to look.
Gold is still correlated to the USD Gold is still priced as an opportunity cost to real US Bond yields. These correlations still exist. They are simple mathematical facts. There is no denying this. Specifically:
Gold is Still Priced in Dollars
Gold is still priced in USD, therefore the higher the buying power of the USD (the less dollars are available) , the lower the price of Gold. That’s just a supply/demand fact.
Yet gold remains buoyant in the face of a strong USD. Why?
Owning Gold Still Has Opportunity Cost
Similarly, the higher real rates are, the bigger the opportunity cost to own Gold. That is also a fact related to PV and FV of money.
How much interest are you willing to give up now for the possibility to make money on Gold in the future?
If these correlations still exist, what is going on? US financial correlations are resetting to make room for other forces.
2- Dollar Correlations Are Not Broken
From: Gold, The Everything Hedge Revisited
Gold hasn’t decoupled from yields and the dollar, but the beta has decreased. While a gap has opened up, this does not mean the relationship has broken down.
So; why is Gold higher if these relationships are not broken? The simple answer is, China wants the gold. But it’s more than that. They are driving correlations now as well. By now we all know why “they want the gold”. The world needs a trustworthy Store of Value for trade with no counterparty risk to replace US Bonds.
Given the decreased reliability of USD correlations for pricing Gold what correlations are stepping into the breach? The answer is China correlations.
3- China Correlations Matter
China is…
buying Gold.
ignoring the USD and real yields.
spearheading the BRICS multipolarity.
the second largest economy in the world.2
The Chinese economy is increasingly governing the price of Gold now3. Therefore, the price of Gold *must* be correlating with some Chinese data as well. That data will give a clue as to what is macro-economically (we know the secular reasons) driving both the PBOC and their public to buy Gold. So what is governing the buying?
4- Correlations Govern China's Buying
Correlations in reality are manifestations of economic limitations on supply/demand behavior. If your bank account is low on money, you spend less. That is a correlation governing your behavior. That is all correlations truly are. They are manifestations of economic governors/limiters on behavior4.
So assuming the buyers of gold are not stupid, what is limiting their behavior? What is Gold correlated to now?
We need a new correlation at the table. What limits the buying? Something has to!
5- What Governs How Much They Want The Gold?
Put another way. If gold is not governed by the USD lately, and Gold is ignoring the rate of interest money can earn in US Bonds… what does it care about? What is Gold correlated to if not the US dollar or US Rates now? The answer is, China’s bonds and China’s currency. For this note, let’s ignore the Yuan currency, which is restricted by government. That leaves their domestic bond market. Let’s take a quick look at their recent policies.
China’s real bond yields are dropping precipitously now. China is using targeted QE to boost its economy. China has thus reduced the opportunity cost for its citizens to own Gold ( and stocks) by completely burying its bond yields.
Gold versus CGB yields (inverted)….
Gold versus US Real Rates (inverted)…
Gold is tied to China’s economy right now. From a macro point of view, China is in a deflationary problem. From a secular point of view, this is part of their retooling their finances for a BRICS launch. Thus, when they successfully weaken the Yuan , it should drive Gold’s price down somewhat as their buying power will diminish.
The western world thinks that by directing their citizens to buy Gold they are adding to deflationary trouble.China feels (we think) that they must buy more gold as an SOV in order to finally internationalize the Yuan for BRICs trade. China is doing a bit of a balancing act right now it seems. Here is a Goldman institutional trader’s recent comment on the concept:
6- Goldman Takes Note
China 10yr yields have been a one directional trade (lower). Despite growth in the west the China economy has struggled to adapt to a slumping property market and a thematic of onshoring/re-shoring.
Last couple days some hopefulness on stimulus ahead of politburo meeting, some optimism on property side and additional auto stimulus. Given the amount of gold buying out of China perhaps this is much more impactful than we appreciate. It’s not that Gold has diverged from dxy/real/nominal yields in the US it’s just that it is tracing the real/nominal yields of its marginal buyer…China
China is increasingly driving the world economy right now. The key phrase stated by the bank is:
It’s not that Gold has diverged from dxy/real/nominal yields in the US it’s just that it is tracing the real/nominal yields of its marginal buyer…China
Gold, along with every other measure of the global economy is increasingly correlated to China’s economy and therefore its data.Ultimately, If Gold is correlated to the USD, Real Yields which in turn correlate to US economic power; What does Gold’s price ignoring those correlations say about US economic power? What then, does the title “Global Reserve Currency” mean in an economically decentralized multipolar world? That’s the correlation story.
Correlations aren’t breaking. Dominance is.
7- Correlations and Unipolarity/Multipolarity:
What is breaking is the Unipolarity of the US economy dominating all global asset prices. In the currency world this is described as rising Multi-polarity as a reflection of other currencies growing in influence challenging the need and status for the USD as a Global Reserve currency.
The summary of that is: Dollar Unipolarity is dying, and in its place rises a tide of global currency multipolarity, especially in countries where international commodity trade dominates.
We can see this in the rising price of dollar denominated commodities as they trade more and more in local currencies. Effectively, the currencies of these nations will rise relative to USD overtime if this continues. This, even while the other G7 nations lose ground to the dollar.
To be continued…
8- More Correlation Visualizations
Gold, CGB, UST…
Decreasing vol and increasing correlation of China Bonds to Gold price…
Same thing, drawn differently…
Same thing, drawn differently 2…
Gold/ CGB Clean… Feb 1 marked..
Gold, UST Feb 1 marked…
Lastly; What happened in February 2022 to make these correlations snap so strongly? The Ukraine war started, as did the US confiscation of Russian financial assets.
///end///
FootNotes
Almost equally important in the West is an ideological blindness to what a correlation actually represents. Some western analysts and media view correlations as drivers of price. That is wrong. Correlations are manifestations of economic drivers. If Gold is price in USD and it keeps going up despite a strong USD then something else is driving Golds price more important than dollars at least for the time being
Correlations are merely mathematical manifestations of real economic power
their demand, their money, their exchange volumes. All discussed at various times in the past here
Government however enables stupid behavior
IMO correlations work until they dont..
- Morgage backed securities were also mathematically or theoretically sound then we have seen how that ended up when they have started to issue NINJA loans and deal with the corruption of the rating agencies
- or LTCM led by Nobel Prize-winning economists and renowned Wall Street traders.
With Gold the goal is simple : tamme his price and avoid at all cost that a lot of people, especially in the western countries " go physical ".
That has been achieved through several means :
1. Correlations which are based on a narrative.
The proponents will speak about "opportunity cost" vs. the real yield of the US 10 year TBonds. According to this narrative, at the moment, the price of gold is overvalued and so gold should be sold and sent back into his cage. Its what several Banks wrote..
- I do not believe that the index used to calculate the real yield of the TBond is correct but has just been designed to tamme the price of gold. Per instance if we use the shadowstats.com index of prices the US 10y TBond will give a negative real yield and so gold should be bought instead!
- Zoltan wrote about the strategies that should be used by the Fed. In short, get inflation growing at an higher higher than the economy to devaluate the debt. That imply negative real rates which could explain why Gross said recently " stay away from TBonds"!
- I suggest this link. https://www.zerohedge.com/geopolitical/escobar-de-dollarization-bombshell-coming-brics-decentralized-monetary-ecosystem
Its about a possible new decentralised monetary eco-system.
It is indeed a new concept in terms of an international currency anchored in gold (40%) and BRICS+ currencies (60%). It is neither crypto nor stablecoin – as it’s shown.
I do not know how many currencies they will pour in the system but it could end up with some countries in need to buy gold whatever the correlations!
- it is close to what the National CB of the EU have been doing. To have in their vaults a quantity of gold same for all the members in proportion to their GDP. Then when the politicians will decide they will be ready to reprice gold they have at an higher price : 3000$, 5000$? Correlations? I forget, the Euro System is bankrupt!
2. Beside these narratives " Peter Hambro. BIS, Central Banks Are Rigging Gold Market Using Bullion Banks' Paper Gold"
https://www.zerohedge.com/markets/peter-hambro-bis-central-banks-are-rigging-gold-market-using-bullion-banks-paper-gold
Peter had been working for a Bullion Bank for years...
Zoltan wrote also that for years the Banks got the implicit guaranty [ from the CB ] that gold will NEVER be used again as mean of payment. If gold come back what will happen then to the 250-300 Trillions $ of gold paper issued by the Banks vs. 16 Trillions of gold above ground?
IMO we are living in hinging times, many things can change. Accordingly it is very dangerous to stick with manipulated correlations.
PS. What about a correlation between the US TBonds and what was called "L'emprunt Russe"? Will the TBonds end the same way ? When the Bolsheviks came to power (1917), Russia decided not to repay this loan. The result was that many French people could used it only to cover their toilet's walls...😂😱
HOW about the value of gold is rising , and the dollar s value is decreasing short simple and sweet .
THE NO CLOTHES DOLLAR will be fully exposed if the GOLD OIL TRADE IS AGAIN EXCEPTED GLOBALLY