Gold

Please note that we will be on our summer holidays next week. Our next report will come out on August 20. Highlights The 30-year bond yield is the puppet master pulling the strings of all other investments. Where 30-year bond yields are still far from the lower bound, they will ultimately get a lot closer. Continue to overweight 30-year bonds in the US and periphery Europe versus 30-year bonds in core Europe. Continue to overweight the US stock market versus the European stock market. An expected near-term setback to stocks versus bonds will briefly pause the European currency rally. The gold rally is also due a pause, given that it is overstretched relative to the decline in the real bond yield. Fractal trade: Long USD/PLN. Feature Chart I-1AThe Collapsed 30-Year Bond Yield Explains The Collapse Of Banks... The Collapsed 30-Year Bond Yield Explains The Collapse Of Banks... The Collapsed 30-Year Bond Yield Explains The Collapse Of Banks... Chart I-1B...And The Collapsed Earnings Yield (Surging Valuation) Of Tech And Healthcare ...And The Collapsed Earnings Yield (Surging Valuation) Of Tech And Healthcare ...And The Collapsed Earnings Yield (Surging Valuation) Of Tech And Healthcare   The abiding mantra of this publication is that investment is complex, but it is not complicated. By complex, we mean that the financial markets are not fully predictable or analysable. By not complicated, we mean that the relative prices of everything are inextricably connected, rather like the movements of a puppet. All you need to do is find the puppet master pulling the strings. Right now, the puppet master is the 30-year bond. The Real Action Is In 30-Year Bonds While most people are focussing on the 10-year bond yield, the real action has been at the ultra-long 30-year maturity. In the US and periphery Europe, 30-year yields are within a whisker of all-time lows. Yet these ultra-long bond yields are still well above those in core Europe which are much closer to the lower bound. The upshot is that while all yields have equal scope to rise, yields have more scope to fall further in the US and periphery Europe than in core Europe (Chart I-2 and Chart I-3). Chart I-230-Year Yields In The US And Periphery Europe... 30-Year Yields In The US And Periphery Europe... 30-Year Yields In The US And Periphery Europe... Chart I-3...Are Still Well Above Those In ##br##Core Europe ...Are Still Well Above Those In Core Europe ...Are Still Well Above Those In Core Europe This simple asymmetry has created a winning relative value strategy that will keep on winning. Overweight 30-year bonds in the US and periphery Europe versus 30-year bonds in core Europe. Our preferred expression is to overweight 30-year bonds in the US and Spain versus Germany and France. Bond yields have more scope to fall further in the US and periphery Europe than in core Europe. Remarkably, in the US, the 10-year real yield is also tightly tracking the 30-year nominal yield (minus a constant 2.2 percent) (Chart I-4). Using a little algebra, this means that the market’s 10-year inflation expectation is just a steady-state value of 2.2 percent minus a shortfall equalling the shortfall in the 10-year nominal yield versus the 30-year nominal yield (Chart I-5). Chart I-4The 10-Year Real Yield Is Just ##br##Tracking The 30-Year Nominal ##br##Yield The 10-Year Real Yield Is Just Tracking The 30-Year Nominal Yield The 10-Year Real Yield Is Just Tracking The 30-Year Nominal Yield Chart I-5The 10-Year Inflation Expectation Can Be Derived From The 30-Year And 10-Year Nominal Yields The 10-Year Inflation Expectation Can Be Derived From The 30-Year And 10-Year Nominal Yields The 10-Year Inflation Expectation Can Be Derived From The 30-Year And 10-Year Nominal Yields 10-year inflation expectation = 2.2 – (30-year nominal yield – 10-year nominal yield) The reason that this is remarkable is we can explain the trend in inflation expectations from just the 30-year and 10-year nominal yields, and nothing more. In turn, gold is tightly tracking the inverted real yield, as it theoretically should. Gold, which generates no yield, becomes relatively more valuable as the real yield on other assets diminishes (Chart I-6). Having said that, the most recent surge in the gold price is stretched relative to its relationship with the real bond yield, suggesting that the strong rally in gold is due a pause (Chart I-7). Chart I-6Gold Is Just Tracking The (Inverted) Real Yield... Gold Is Just Tracking The (Inverted) Real Yield... Gold Is Just Tracking The (Inverted) Real Yield... Chart I-7...But Gold's Most Recent Surge Is ##br##Stretched ...But Gold's Most Recent Surge Is Stretched ...But Gold's Most Recent Surge Is Stretched The 30-Year Bond Is Driving Stock Markets Moving to the stock market, bank relative performance has closely tracked the collapse in the 30-year yield, because the collapsed bond yield signals both weaker bank credit growth and a likely increase in banks’ non-performing loans (Chart of the Week, left panel). Banks and other ‘value cyclicals’ whose cashflows are in terminal decline are highly sensitive to the prospects for near-term cashflows, which are under severe pressure in the pandemic era. At the same time, as the distant cashflows are small, the banks’ share prices are less sensitive to the uplifted net present values of these distant cashflows that come from lower bond yields. In contrast, technology, healthcare and other ‘growth defensives’ generate a growing stream of cashflows. Making their net present values highly sensitive to a change in the bond yield used to discount those large distant cashflows. The profits of the tech and healthcare sectors are proving to be highly resilient in the pandemic era. Through 2018, the 30-year yield went up by 1 percent, so the forward earnings yield of growth defensives went up by 1 percent (their valuations fell). Subsequently, the 30-year yield has collapsed by 2 percent, so unsurprisingly the forward earnings yield of growth defensives has also collapsed by 2 percent (their valuations have surged). To repeat, financial markets are not complicated (Chart of the Week, right panel). Moreover, the profits of the growth defensives are proving to be highly resilient in the pandemic era, holding up well in the worst shock to demand since the Great Depression. The combination of resilient profits with higher valuations explains why the technology and healthcare sectors are reaching new highs, while the rest of the stock market is going nowhere (Chart I-8). Chart I-8Tech And Healthcare At New Highs While The Rest Of The Market Languishes Tech And Healthcare At New Highs While The Rest Of The Market Languishes Tech And Healthcare At New Highs While The Rest Of The Market Languishes Meanwhile, the relative performance of stock markets is also uncomplicated. It just stems from the relative exposure to the high-flying growth defensive sectors. Compared with Europe, the US has a 20 percent larger exposure to technology and healthcare (Chart I-9). Which is all you need to explain the consistent outperformance of the US versus Europe (Chart I-10). Chart I-9The US Is 20 Percent Over-Exposed To Tech And Healthcare... The US Is 20 Percent Over-Exposed To Tech And Healthcare... The US Is 20 Percent Over-Exposed To Tech And Healthcare... Chart I-10...Which Explains Its Consistent Outperformance Versus Europe ...Which Explains Its Consistent Outperformance Versus Europe ...Which Explains Its Consistent Outperformance Versus Europe A Quick Comment On European Currencies And The Dollar Turning to the foreign exchange market, the recent rally in European currencies can at least partly be explained as a sell-off in the dollar. Begging the question, what is behind the dollar’s recent weakness? The dollar has moved as a mirror-image of the global stock market. For the broad dollar index, the explanation is quite straightforward. True to its traditional role as a haven currency, the dollar has moved as a mirror-image of the global stock market, measured by the MSCI All Country World Index (in local currencies). Simply put, as the stock market has shaken off its year-to-date losses, the dollar has shaken off its year-to-date gains (Chart I-11). Chart I-11The Dollar Has Just Tracked The (Inverted) Stock Market The Dollar Has Just Tracked The (Inverted) Stock Market The Dollar Has Just Tracked The (Inverted) Stock Market Looking ahead, we can link the prospects of currencies to the outlook for 30-year bond yields. A further compression in yields will weaken the dollar, and help European currencies, in two ways. First, as already mentioned, yields have more scope to decline in the US than in core Europe, and a fading US yield premium will weigh on the dollar. Second, to the extent that the lower yields can prevent a protracted bear market in stocks and other risk-assets, non-haven currencies can perform well versus the haven dollar.  Having said that, an expected near-term setback to stocks versus bonds will briefly pause the European currency rally. Concluding Remarks The charts in this report should leave you in no doubt that the 30-year bond yield – particularly in the US – is the puppet master pulling the strings of all investments: bond market relative performance, real bond yields, gold, banks, growth defensives, equity market relative performance, and major currencies. Which raises the crucial question, can the downtrend in 30-year bond yields continue? Yes, absent an imminent vaccine or treatment for Covid-19, the downtrend in yields can continue. As we explained last week in An Economy Without Mouths And Noses Will Lose 10 Percent Of Jobs, the spectre of mass unemployment is looming large. Specifically, the major threat to the jobs market lies in the coming months when government lifelines to employers – such as state-subsidised furlough schemes – are cut or weakened. Where 30-year bond yields are still far from the lower bound, they will ultimately get a lot closer. Hence, it is inevitable that those central banks that can become more dovish will become more dovish. Given the political difficulties of using fiscal policy bullets, the lessons from Japan and Europe are that the monetary policy bullets get fully expended first. In practical terms, this means that where 30-year bond yields are still far from the lower bound, they will ultimately get a lot closer. The upshot is that core European bonds will continue to underperform US bonds, and that the European stock market will continue to underperform the US stock market. European currencies will trend higher versus the dollar, albeit a setback to stocks versus bonds is a near-term risk to the European currency uptrend. Fractal Trading System* This week’s recommended trade is to play a potential countertrend move in the dollar via long USD/PLN. The profit target and symmetrical stop-loss is set at 4 percent. The rolling 1-year win ratio now stands at 57 percent. Chart I-12USD/PLN USD/PLN USD/PLN When the fractal dimension approaches the lower limit after an investment has been in an established trend it is a potential trigger for a liquidity-triggered trend reversal. Therefore, open a countertrend position. The profit target is a one-third reversal of the preceding 13-week move. Apply a symmetrical stop-loss. Close the position at the profit target or stop-loss. Otherwise close the position after 13 weeks. * For more details please see the European Investment Strategy Special Report “Fractals, Liquidity & A Trading Model,” dated  December 11, 2014, available at eis.bcaresearch.com.   Dhaval Joshi Chief European Investment Strategist dhaval@bcaresearch.com Fractal Trading System   Cyclical Recommendations Structural Recommendations Closed Fractal Trades Trades Closed Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Chart II-1Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Chart II-2Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Chart II-3Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Chart II-4Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields   Interest Rate Chart II-5Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations  

Highlights The dollar is on the verge of a significant breakdown. If the DXY punches through 94, it will likely mark the beginning of a structural bear market. The most recent catalyst – fiscal support in the euro zone – has been good news on the “anti-dollar” front. Agreement on the EU recovery fund has underscored a powerful centripetal force for the euro. Because it is a reserve currency, a breakdown in the dollar will amplify the global liquidity surge. This will lead to a self-reinforcing spiral of better global growth, and a weaker dollar. Our long Scandinavian currency basket and long silver versus gold positions have benefitted tremendously from the shift in sentiment. Stick with them. While our technical indicators are flagging the dollar as oversold, any bounce from current levels should be shorted.  Our FX model remains dollar bearish, and is recommending shorting the DXY for the month of August. Feature Chart I-1On A Precipice The Great FX Rotation The Great FX Rotation The DXY index is punching below key support levels and on the verge of a significant multi-year decline. Up until March, the dollar was trading in a narrow band (Chart I-1). With that support now breached, the next key test for the DXY index will be the 93-94 zone, defined by the upward-sloping trend line, in place since the 2011 lows. As the breakdown becomes more broad-based, especially vis-a-vis emerging market currencies, this will cement the transition from easing financial conditions to improving global growth. Our trade basket has benefitted significantly from the shift in market sentiment, especially being long the NOK, the SEK and silver relative to gold. As Chart I-2 shows, while gold and the safe-haven currencies remain this year’s frontrunners, the more industrial metals such as silver and platinum will likely take over the baton by year end. Within the G10 universe, cyclical currencies such as the Australian dollar and the Norwegian krone are now in the technical definition of a bull market. Such a rotation usually signals a genuine and potentially meaningful breakdown in the dollar. Chart I-2The Great FX Rotation The Great FX Rotation The Great FX Rotation Our trade basket has benefitted significantly from the shift in market sentiment, especially being long the NOK, the SEK and silver relative to gold.  Technical indicators suggest the dollar is likely to consolidate losses in the weeks ahead. Our intermediate-term indicator is in the lower decile of its range, and speculators are very short the cross (see US dollar section on page 14). That said, any bounce should be used as an opportunity to establish fresh short positions, contrary to the “buy-on-the-dip” strategy that has worked well over the last decade.  DXY Breakdown: What Has Changed? US dollar weakness has been driven by three interrelated factors: Non-US economies that were initially hit by COVID-19 are well into their reopening phases. Meanwhile, new infections in the US are proving rather sticky. As a result, economic momentum is higher outside the US. This partly explains why the euro is outperforming both the US dollar and the yen (Chart I-3). Money velocity is rising faster outside the US, suggesting animal spirits are being rekindled at a faster pace abroad (Chart I-4). This is evident in capital flows, where some non-US markets have started to outperform. In the classical equation MV=PQ,1 a rise in M has historically been accompanied by a collapse in V, suggesting the economy remained in a liquidity trap. With the fiscal spending spigots now open almost everywhere, a rise in both M and V will be explosive for nominal output. Chart I-3Positive COVID-19 Trends For Europe Positive COVID-19 Trends For Europe Positive COVID-19 Trends For Europe Chart I-4Money Velocity Outside The US Money Velocity Outside The US Money Velocity Outside The US There was significant progress towards a European fiscal union this week, with leaders agreeing to a €750 billion recovery fund. Assuming the agreement is ratified, this will underscore a powerful centripetal force for the common-currency union. As the “anti-dollar,” this is positive for the euro (and negative for the greenback). More on this later. The US economy had been relatively resilient compared to the rest of the world, at least until late. This was in part driven by a late start to state-wide shutdowns. With various US municipalities and states now reversing reopening plans, economic activity abroad is now improving relative to the US. Chart I-5 shows the economic surprise index between the Eurozone and the US is inflecting sharply higher from very depressed levels. Historically, this has usually put a floor under the euro. Similarly, G10 PMIs have bottomed relative to the US. These trends should continue in the months ahead. Chart I-5EUR/USD And Relative Growth EUR/USD And Relative Growth EUR/USD And Relative Growth How High Can EUR/USD Rise? Agreement on the EU recovery fund was a historic event, not due to the size of the package but because of revealed preferences toward euro membership. For over two decades, the standard dilemma plaguing the euro area was that centralized monetary policy was never a panacea for desynchronized business cycles.2 The lack of fiscal transfers between member nations amplified this problem. With Italian and Spanish bond yields now collapsing towards those in the core, liquidity is flowing to where it is most needed, significantly curtailing euro break-up risk. The key components of the agreement are €360 billion in the form of loans and €390 billion in the form of grants. The money will be borrowed via bonds issued by the European Commission, with maturities of three to 30 years. Repayment will not be due until 2027. The most important component of the deal, the grants, is a de facto fiscal transfer. Going forward, the next catalyst for euro strength must be growth differentials between the euro zone and the US. This will translate into an improvement in the equilibrium rate of interest between the two blocs (Chart I-6). This is quite plausible in a post-COVID-19 world. As a relatively closed economy, the US has tended to have a higher services component to GDP. However, the service sector has been hit much harder by the pandemic due to social distancing measures that will likely remain in place for a while. A more drawn-out services recovery raises the prospect that countries geared more towards manufacturing, such as Europe, Japan and China, could experience better growth (Chart I-7). Chart I-6EUR/USD And The Neutral Rate EUR/USD And The Neutral Rate EUR/USD And The Neutral Rate Chart I-7Service Industries Could Stay Weak For A While Service Industries Could Stay Weak For A While Service Industries Could Stay Weak For A While Chart I-8The European Periphery Is Competitive Again The European Periphery Is Competitive Again The European Periphery Is Competitive Again Internally within the euro zone, a powerful adjustment has already occurred. Unit labor costs in Greece, Ireland, Portugal and Spain are well off their peak. This has effectively eliminated the competitiveness gap with the core that had accumulated over the previous two decades (Chart I-8). Italy remains saddled with a rigid and less-productive workforce, but overall adjustments have still come a long way in plugging a key fissure undermining the common-currency area. The euro tends to be largely driven by pro-cyclical flows. Fortunately for investors, European equities, especially those in the periphery, remain unloved, given they are trading at very cheap multiples. Part of the reason is that most Eurozone bourses are heavy in cyclical stocks that are well into a 10-year relative bear market.3  A re-rating of cyclical stocks, especially banks and energy, relative to defensives could be the catalyst that carries the next leg of the euro rally. This could push the EUR/USD towards 1.20. As higher-beta, the Scandinavian currencies will also benefit. For now, most analysts remain very pessimistic about European profits relative to those in the US, but that could change if the dollar enters a structural bear market (Chart I-9). Chart I-9Relative Profit Revisions Lead EUR/USD Relative Profit Revisions Lead EUR/USD Relative Profit Revisions Lead EUR/USD Cyclical Or Structural Move? If the DXY punches through 94, it will likely mark the beginning of a structural bear market.  If the DXY punches through 94, it will likely mark the beginning of a structural bear market. The dollar tends to run in long cycles, driven by fundamentals but also confidence. In our report last week, we suggested three indicators for gauging a shift in confidence. The total return of US bonds versus gold: Gold and US Treasurys are competing assets (Chart I-10), with the dollar being the key arbiter, as we argued last week. The TLT/GLD ratio has dropped from over 1.16 to 0.96, putting it at the precipice of bear-market territory. The USD/CNY exchange rate: Tensions are flaring up between the US and China, with the latest being the US government’s closure of China’s Houston consulate. Yet USD/CNY is still holding around 7. As the key arbiter between the dollar and emerging market currencies, a firm yuan limits upward pressure on the greenback. The gold-to-silver ratio (GSR): This correlates well with the dollar, and has absolutely collapsed (Chart I-11). Given similar moves in gold versus copper and oil, it is fair to assume that the global economy is not in a liquidity trap. Chart I-10Gold And Treasurys Are Competing Assets Gold And Treasurys Are Competing Assets Gold And Treasurys Are Competing Assets Chart I-11The Gold-To-Silver Ratio Has Collapsed The Gold-To-Silver Ratio Has Collapsed The Gold-To-Silver Ratio Has Collapsed The more important point is that there is a nascent, concerted push by both institutional investors and central banks to diversify out of dollar assets: The S&P 500 usually moves inversely to gold, but both have been moving in sync since the March lows (Chart I-12). This suggests investors have been using gold rather than US bonds to hedge their equity long positions. The dollar proved to be the best safe-haven asset during the March drawdown. With the Federal Reserve having flooded the system with dollars, gold (and precious metals) are the next logical choice. Since 2014, central banks have been aggressively diversifying out of their dollar holdings. This is not only evident in the official TIC data that continues to show foreign officials are selling Treasurys, but within IMF reserve data well. Part of these flows have gone into other currencies, especially the yen, but a huge portion has been to gold (Chart I-13). This has been driven by emerging market countries such as Russia and China, the same concerns in the middle of geopolitical confrontations with the US. Chart I-12Gold And The S&P 500 Are Moving Together Gold And The S&P 500 Are Moving Together Gold And The S&P 500 Are Moving Together Chart I-13Central Banks Are Loading Their Gold Vaults Central Banks Are Loading Their Gold Vaults Central Banks Are Loading Their Gold Vaults Within our service (and together with our Commodity & Energy colleagues), we have been highlighting that precious metals will be a huge beneficiary from the Fed’s reflationary efforts, even though they are overbought. As a hedged bet, we have been long silver versus gold, a trade that continues to perform well.   As the gold trade becomes crowded and demand for diversification from fiat money remains strong, silver and platinum could be the outperformers.  Chart 14 shows that precious metals such as silver and platinum are much cheaper from a historical perspective. As the gold trade becomes crowded and demand for diversification from fiat money remains strong, silver and platinum could be the outperformers. Chart I-14Silver And Platinum Remain Relatively Cheap Silver And Platinum Remain Relatively Cheap Silver And Platinum Remain Relatively Cheap In a nutshell, remain long silver, SEK, NOK and petrocurrencies. Currency traders can also add platinum to the list. These top picks will continue to benefit from global reflation, dollar weakness and a breakout in the euro. Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com   Currencies US Dollar Chart II-1USD Technicals 1 USD Technicals 1 USD Technicals 1 Chart II-2USD Technicals 2 USD Technicals 2 USD Technicals 2 Recent data in the US have been positive: Existing home sales surged by 20.7% in June compared with May, the highest monthly gain on record. This followed a strong increase in building permits and housing starts last week. The University of Michigan consumer sentiment declined from 78.1 to 73.2 in July, while the Chicago Fed national activity index ticked up from 3.5 to 4.1 in June. Initial jobless claims increased by 1416K for the week ended July 17th, higher than the 1307K increase the previous week. The DXY index continued to edge lower, falling by 1% this week. Our bias is that the US dollar is likely to begin a long depreciation should the global economy continue to rebound.   Report Links: A Simple Framework For Currencies - July 17, 2020 DXY: False Breakdown Or Cyclical Bear Market? - June 5, 2020 Cycles And The US Dollar - May 15, 2020   The Euro Chart II-3EUR Technicals 1 EUR Technicals 1 EUR Technicals 1 Chart II-4EUR Technicals 2 EUR Technicals 2 EUR Technicals 2 Recent data in the euro area have been mixed: The current account surplus narrowed from €14.4 billion to €7.95 billion in May. Headline inflation was flat at 0.3% year-on-year in June. Core inflation also remained at 0.8% year-on-year in June. Preliminary consumer confidence marginally fell from -14.7 to -15 in July. The euro appreciated by 1.4% against the US dollar this week, climbing to the highest level in almost two years, alongside European equities. The catalyst was the €750 billion rescue fund (around 5.5% of EU GDP) announced this Tuesday. The fact that member countries reached an agreement is encouraging for the sustainability of the euro.   Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019   The Yen Chart II-5JPY Technicals 1 JPY Technicals 1 JPY Technicals 1 Chart II-6JPY Technicals 2 JPY Technicals 2 JPY Technicals 2 Recent data in Japan have been mostly negative: The trade deficit narrowed from ¥601 billion to ¥424 billion in June. Exports fell by 26.2% year-on-year while imports fell by 14.4% In June. National headline CPI remained flat at 0.1% year-on-year in June, while core inflation was also unchanged at 0.4%. The Jibun Bank manufacturing PMI increased from 40.1 to 42.6 in July. The Japanese yen rose by 0.2% against the US dollar this week. In the monthly report released this Wednesday, Japan’s Cabinet Office reported improvement in 6 out of 14 economic categories, including consumer spending, exports, production and public investment. However, capital spending, corporate profits and employment remain weak due to the pandemic. That said, we are long the Japanese yen as a  safe-haven hedge.   Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 Building A Protector Currency Portfolio - February 7, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020   British Pound Chart II-7GBP Technicals 1 GBP Technicals 1 GBP Technicals 1 Chart II-8GBP Technicals 2 GBP Technicals 2 GBP Technicals 2 Recent data in the UK have been positive: The Rightmove house price index rose by 3.7% year-on-year in July, up from 2.1% the previous month. CBI industrial trends survey orders recovered from -58% to -46% in July. The British pound appreciated by 1.6% against the US dollar this week. Near-term volatility around Brexit negotiations is a negative for the pound, but it is cheap and unloved.   Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019   Australian Dollar Chart II-9AUD Technicals 1 AUD Technicals 1 AUD Technicals 1 Chart II-10AUD Technicals 2 AUD Technicals 2 AUD Technicals 2 Recent data in Australia have been mixed: Retail sales rose by 2.4% month-on-month in June, following 16.9% increase the previous month. NAB business confidence fell to -15 from -12 in Q2. The Australian dollar jumped by 2.3% against the US dollar this week. The recent RBA meeting minutes suggested that there is no need to adjust its policy measures in the current environment and reiterated that negative interest rates remain “extraordinarily unlikely”.   Report Links: On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019   New Zealand Dollar Chart II-11NZD Technicals 1 NZD Technicals 1 NZD Technicals 1 Chart II-12NZD Technicals 2 NZD Technicals 2 NZD Technicals 2 There was scant data from New Zealand this week: The New Zealand business index surged from 37.5 to 54.1 in June. The New Zealand dollar rose by 1.8% against the US dollar this week. Following weak inflation data last week , the Westpac Economic Bulletin suggests consumer prices will remain subdued on weakened demand. This raises the prospect of further stimulus from the RBNZ.   Report Links: Currencies And The Value-Versus-Growth Debate - July 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019   Canadian Dollar Chart II-13CAD Technicals 1 CAD Technicals 1 CAD Technicals 1 Chart II-14CAD Technicals 2 CAD Technicals 2 CAD Technicals 2 Recent data in Canada have been positive: Retail sales increased by 18.7% month-on-month in May. Auto sales were particularly strong. The new house price index increased by 1.3% year-on-year in June.  The Teranet/National Bank house price index rose by 5.9%. Headline inflation increased from -0.4% to 0.7% year-on-year in June, as oil prices recovered. Core inflation also rose from 1.6% to 1.8% year-on-year in June. The Canadian dollar rose by 1.3% against the US dollar this week. The inflation data were stronger than expected, led by gas, food and shelter prices. Going forward, a recovery in energy prices will be important for the performance of the CAD. In general, we like petrocurrencies.   Report Links: Currencies And The Value-Versus-Growth Debate - July 10, 2020 More On Competitive Devaluations, The CAD And The SEK - May 1, 2020 A New Paradigm For Petrocurrencies - April 10, 2020 Swiss Franc Chart II-15CHF Technicals 1 CHF Technicals 1 CHF Technicals 1 Chart II-16CHF Technicals 2 CHF Technicals 2 CHF Technicals 2 Recent data in Switzerland have been positive: The trade balance widened marginally from CHF 2.7 billion to CHF 2.8 billion in June. Exports rose by 6.9% month-on-month while imports jumped by 7.3%. Total sight deposits continued to increase from CHF 688.6 billion to CHF 691.5 billion for the week ended July 17th. The Swiss franc appreciated by 1.3% against the US dollar this week. Switzerland has seen a trade recovery in recent months. Notably, luxury goods exports like Swiss watches increased by 58.9% month-on-month in June, though well below pre-COVID-19 levels.   Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020   Norwegian Krone Chart II-17NOK Technicals 1 NOK Technicals 1 NOK Technicals 1 Chart II-18NOK Technicals 2 NOK Technicals 2 NOK Technicals 2 Recent data in Norway have been positive: Exports and imports both improved in June, especially with rebounding oil prices. The trade surplus widened from NOK2.7 billion to NOK3.2 billion. The Norwegian krone appreciated by 1.3% against the US dollar this week. Our Commodity & Energy team holds the view that global fiscal stimulus to combat COVID-19 will support global oil demand. Moreover, both OPEC and the US are likely to continue production cuts. Their bias is that oil prices will continue to grind higher, which is bullish for the Norwegian krone. Swedish Krona Chart II-19SEK Technicals 1 SEK Technicals 1 SEK Technicals 1 Chart II-20SEK Technicals 2 SEK Technicals 2 SEK Technicals 2 Recent data in Sweden have been negative: The unemployment rate rose to 9.8% in June, up from 9% the previous month and 7.2% the same month last year. The Swedish krona surged by 2% against the US dollar this week. The latest Labor Force Survey released this week showed that the labor market in Sweden continues to deteriorate. In June, employment fell by 148,000. Average hours worked per week fell by 8.4%. That said, the Swedish krona remains cheap and will benefit from a global economic recovery.   Footnotes 1Where M = money supply, V = velocity of money, P = price level and Q = output. 2Please see Foreign Exchange Strategy Weekly Report, "EUR/USD And The Neutral Rate Of Interest", dated June 14, 2019. 3Please see Foreign Exchange Strategy Special Report, "Currencies And The Value-Vs Growth Debate", dated July 10, 2020.   Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights Silver will outperform gold in 2H20, as industrial production and consumer-product demand revives on the back of the massive global stimulus deployed to reverse the hit to aggregate demand inflicted by the COVID-19 pandemic. Silver’s physical supply growth largely is a by-product of base-metals mining, specifically copper, zinc and lead.  As mining capex for these base metals is reduced in response to weaker demand, silver’s physical surplus will continue to contract.  On the demand side, a pick-up in industrial activity will benefit silver more than gold, given its relatively higher share of industrial consumption. The gold/silver ratio most likely contracts from its current level of 99 over the remainder of the year, given our expectation gold will appreciate 7% in 2H20 and finish the year at $1,900/oz, while silver is expected to appreciate ~ 16% ending 2020 at $21/oz. Elevated economic and political uncertainty – chiefly escalating US-China and US-Europe trade tensions – likely will keep a bid under gold and the USD. This could limit the rally in commodities (ex-gold) generally. We are getting long December 2020 COMEX silver at tonight’s close. Feature While silver is sensitive to the same financial variables driving gold’s performance – chiefly real rates, the broad trade-weighted USD, inflation and inflation expectations – it is far more responsive to the evolution of the real economy. When investors seek a safe haven in especially volatile or highly uncertain markets, silver is not their first choice. Nor is it the go-to portfolio diversifier investors seek out to hedge against higher inflation or inflation expectations. Investors typically turn to the USD and gold when risks rise (Chart of the Week).1 While silver is sensitive to the same financial variables driving gold’s performance – chiefly real rates, the broad trade-weighted USD, inflation and inflation expectations – it is far more responsive to the evolution of the real economy than gold: More than half of silver’s demand is accounted for by industrial applications – e.g., solar panels, batteries and electronics, vs. ~ 10% for gold (Chart 2). Chart of the WeekUSD, Gold Attract Investors In Volatile, Uncertain Markets USD, Gold Attract Investors In Volatile, Uncertain Markets USD, Gold Attract Investors In Volatile, Uncertain Markets Chart 2Silver Is More Responsive To the Real Economy Than Gold Silver Likely Outperforms Gold In 2H20 Silver Likely Outperforms Gold In 2H20 Gold is a far deeper market than silver (Chart 3). Greater two-way flow on the bid and offer – augmented by the greater involvement of institutions and central banks in those flows – makes the gold market more efficient in terms of processing financial and economic information. Because of this, gold prices and gold options’ implied volatility are useful parameters for following investors’ (and central banks’) assessments of future economic conditions. Silver tends to overshoot and undershoot in its response to the arrival of new economic and financial information – e.g., economic shocks like the COVID-19 outbreak (Chart 4).2 Chart 3Gold Market Is Deeper Than Silver ... Gold Market Is Deeper Than Silver ... Gold Market Is Deeper Than Silver ... Chart 4... Making Gold Less Volatile Relative To Silver ... Making Gold Less Volatile Relative To Silver ... Making Gold Less Volatile Relative To Silver Because silver is sensitive to the same financial variables driving gold, it can attract more retail speculative interest when the larger investment narrative favors gold as a portfolio hedge. All the same, because silver is sensitive to the same financial variables driving gold, it can attract more retail speculative interest when the larger investment narrative favors gold as a portfolio hedge. For this reason, it is difficult to recommend silver as a long-term portfolio hedge. It is, however, useful in expressing a view on short-term economic and financial expectations. Supply Growth Will Be Subdued Mining output of silver is largely a by-product of copper, zinc and lead mining, as the white metal often is found in deposits of these ores. Because of the COVID-19-induced base-metals demand destruction, miners most likely will reduce capex at least for this year (Chart 5).3 This will cause mine production to fall, which will reduce the rate of growth in supply, even with recycling remaining fairly constant (Chart 6). As a result, the white metal’s physical surplus is expected to continue contracting relative to demand this year (Chart 7). Chart 5Expect Lower Base-Metals Capex To Reduce Silver Supply Growth Silver Likely Outperforms Gold In 2H20 Silver Likely Outperforms Gold In 2H20   Chart 6Falling Supplies Of Silver Will Tighten Physical Balances Silver Likely Outperforms Gold In 2H20 Silver Likely Outperforms Gold In 2H20 Chart 7Silver’s Supply Surplus Likely Will Contract Silver Likely Outperforms Gold In 2H20 Silver Likely Outperforms Gold In 2H20   Demand Follows The Real Economy Slightly more than half of silver demand is accounted for by industrial applications (Chart 8). Gold’s industrial-applications share is ~ 10%, as noted above. This keeps the silver-to-gold ratio closely aligned with global industrial production (Chart 9). Chart 8Industrial Usage Dominates Silver Demand Silver Likely Outperforms Gold In 2H20 Silver Likely Outperforms Gold In 2H20 Chart 9Silver Prices Closely Tied To Global Industrial Production Silver Prices Closely Tied To Global Industrial Production Silver Prices Closely Tied To Global Industrial Production The massive fiscal and monetary stimulus deployed by governments and central banks globally certainly raises the odds of an overshoot, as demand revives and miners are reducing capex (Chart 10).4 Against this backdrop, a better-than-expected recovery in commodity demand cannot be ruled out. However, it is important to emphasize that – given the profound uncertainty dogging commodities generally – a severe undershoot also is possible.  Chart 10Massive Global Stimulus Could Cause Metals (Silver Included) To Overshoot Silver Likely Outperforms Gold In 2H20 Silver Likely Outperforms Gold In 2H20 Silver Poised To Outperform In modeling prices, we capture silver’s safe-haven vs. industrial demand using precious and industrial metals prices (Chart 11). Historically, silver has been as substitute to gold for investors seeking lower-cost exposure to precious metals. This implies silver will follow gold in times of decreasing real rates, rising inflation and/or increasing economic uncertainty. Following a sharp increase in gold prices, silver becomes an attractive safe-haven asset and gets bid up until the disequilibrium between both variables closes. These series are cointegrated in the long-run. On the other hand, silver prices are more responsive to the global industrial cycle than gold. Thus, it partly follows the same underlying trend as industrial metals – mainly copper – prices. Chart 11BCA's Silver Model: Rally Expected BCA's Silver Model: Rally Expected BCA's Silver Model: Rally Expected The model shown in Chart 11 leads us to expect silver prices will outperform gold prices in 2H20. We expect silver to end the year at $21/oz, a 16% increase over the next six months, versus $1,900/oz for gold (up 7%). Given our assessment of these respective markets, we are recommending a long December 2020 COMEX silver position at tonight’s close. We are remaining long gold, as it is more likely to respond favorably to the additional fiscal and monetary stimulus such a turn of events would prompt. Bottom Line: Silver is a thinner market than gold and is more subject to higher volatility. In an environment of historically high global economic policy uncertainty, rising Sino-US and -European trade tensions, and the economic destruction wrought by the COVID-19 pandemic, this amounts to a significant risk for investors (Chart 12). While our modeling indicating silver should outperform gold in 2H20 inclines us to go long December 2020 silver, this could be upended by another wave of COVID-19-induced lockdowns in systematically important economies. This would stop a global economic recovery dead in its tracks. For this reason, we are remaining long gold, as it is more likely to respond favorably to the additional fiscal and monetary stimulus such a turn of events would prompt. Chart 12Heightened Economic Uncertainty Elevates Risk To Silver Positions Heightened Economic Uncertainty Elevates Risk To Silver Positions Heightened Economic Uncertainty Elevates Risk To Silver Positions     Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Hugo Bélanger Associate Editor Commodity & Energy Strategy HugoB@bcaresearch.com       Commodities Round-Up Energy: Overweight Expectations of a deal allowing Libya’s National Oil Corporation (NOC) to resume oil production at some of its fields have increased, following reports of discussions between the Government of National Accord (GNA), the NOC and regional countries overseen by the United Nations and the United States.5 Nonetheless, restarting production will be gradual, as the lack of elementary maintenance since the start of the conflict left pipelines corroding and storage facilities collapsing. Base Metals: Neutral The Baltic Dry Index (BDI) rebounded by more than 300% from its May 2020 low, led by rising iron ore exports to China (Chart 13). As Chinese economic growth resumes, iron ore and base metals demand is expected to increase in 2H20. However, some of the recent support to shipping markets is due to China’s restocking of iron ore, which will fade as inventories return to desired levels. While we expect the BDI to end the year higher, a near-term pullback is possible, given iron ore and freight rates appear to have overshot to the upside. Precious Metals: Neutral The risk of an incessantly strong US dollar remains a headwind to gold and silver prices. The dollar benefits from mounting global economic uncertainty. Thus, the risk of a severe second COVID-19 infection wave, escalating Sino-US and US-European tensions, and the upcoming US election could increase economic and market volatility in 2H20 and keep the dollar in its bull market, which began in 2011, intact (Chart 14). Ags/Softs:  Underweight The USDA this week reported farmers rated 73% of corn planted this season in good to excellent condition for the week ended Jun 28, vs. 56% last year. Soybeans were rated 71% vs 54% in good to excellent condition last year. Winter wheat bucked the year-on-year improvement trend, with 52% of the crop in good to excellent condition vs. 63% last year. Chart 13BDI Rebounding Sharply BDI Rebounding Sharply BDI Rebounding Sharply Chart 14Elevated Policy Uncertainty Supports Gold Elevated Policy Uncertainty Supports Gold Elevated Policy Uncertainty Supports Gold     Footnotes 1     We have noted the anomalous correlation between the broad trade-weighted USD and gold during periods of elevated uncertainty in pervious research. See, e.g., Global Economic Policy Uncertainty Lifts Gold And USD Together, which we published October 24, 2019, prior to the COVID-19 pandemic’s outbreak. This correlation has increased in the wake of the pandemic. 2     For an excellent discussion of information processing by markets, please see Timmerman, Allan and Clive W.J. Granger (2004), “Efficient market hypothesis and forecasting,” International Journal of Forecasting, 20:1, pp. 15 27. 3    Please see PwC’s Mine 2020, Resilient and Resourceful, June 2020 report for discussion of miners’ capex intensions. 4    We would note in passing OPEC 2.0 – the oil-production coalition led by the Kingdom of Saudi Arabia (KSA) and Russia – faces a similar problem in our estimation: It is attempting to sharply lower crude oil output against a highly stimulative global fiscal and monetary backdrop.  The risk that the stimulus is insufficient to revive demand is very real, but a faster-than-expected recovery would spike prices to the upside if demand revives before the producer coalition can increase supply sufficiently to absorb that demand. 5    Please see Libya's NOC confirms international talks on resuming oil output published by reuters.com June 29, 2020..     Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Trade Recommendation Performance In 2020 Q1 Silver Likely Outperforms Gold In 2H20 Silver Likely Outperforms Gold In 2H20 Commodity Prices and Plays Reference Table Trades Closed In 2020 Summary of Trades Closed Trades Silver Likely Outperforms Gold In 2H20 Silver Likely Outperforms Gold In 2H20

Pocketing Gains in Oil/Gold Pair Trade Pocketing Gains in Oil/Gold Pair Trade Our reinstated long XOP / short GDX pair trade hit its rolling 10% stop intraday yesterday, forcing us to crystalize 32% gains in just over a month. While our original thesis for this pair trade that was outlined in the April 27th Weekly Report has not changed, we adhere to the risk management tool we put in place and act on our profit-taking stop. We will be looking to reopen this trade later in the summer at a better entry point, especially if as we highlighted on Monday’s Weekly Report the rise in (geo)political risks serve as a catalyst for a much need broad equity market breather. Bottom Line: Crystallize 32% gains in the long XOP / short GDX pair trade, but stay tuned. ​​​​​​​