We’ve been using the term mini bubble to describe the various market manias that keep popping up. But maybe rolling bubble is a better term.

That’s how Kevin Muir of the MacroTourist newsletter describes what results from the repetitive, overly enthusiastic behaviour of investors.

Another writer has picked up on that theme and makes a compelling case gold may be the next rolling bubble. Here’s why.


by Louis-Vincent Gave, Evergreen Gavekal

Kevin Muir, whose terrific MacroTourist newsletter is both very actionable and very affordable, has described the last year’s investment environment as a series of rolling bubbles:

  • As electric vehicle plays reached dizzying valuations, investors seemed to realize that EVs use about five times as much copper as combustion-engine cars, so copper miners duly soared to new heights.
  • Then crypto was the next big thing, followed by…
  • Video games
  • Lumber
  • Shipping… and so on.

The bubbles have just rolled on from one exciting asset to the next, with investors wondering which will follow. In this note, I will explain why I think gold may be the next one.

To start with, after a fairly ugly August 2020-March 2021, gold is looking technically stronger.

On Tuesday, May 18, the gold price sliced through its 200-day moving average (see left-hand chart below), which may have the effect of attracting the attention of algos and momentum investors.

Also, this rebound is occurring against a macro backdrop that is generally favorable to gold:

  • US treasury yields seem to have stalled in the 1.60-1.75% range (gold’s August-March downdraft coincided with the rebound in US bond yields) yet US inflation data is surprising (some people) on the upside.
  • At the same time, the US dollar—as measured by the DXY index—seems to be breaking down (the right-hand chart below shows that on Tuesday it fell below the psychologically important 90 level).

An environment of constrained yields, rising inflation and a weaker US dollar is manna from heaven for gold bulls.

This environment may change but until it does, the gold price is likely to grind higher, posing the question: will it take out last summer’s high? For the following reasons, I think it will:

Many investors who have grown concerned about currency debasement due to a US policy mix that has pushed twin deficits above 20% of GDP, have found refuge in cryptocurrencies.

These gave extraordinary returns, yet the current reversal raises the concern that some investors may try to cash out of the asset class while they still can.

If so, will they buy US dollars, which are likely still loathed, or instead allocate funds to precious metals that are now enjoying positive momentum?

If, as I believe, the coming summer sees most Americans and Europeans hit the road, oil prices are quite likely to gap higher. This will only add to inflation fears, which—assuming the Federal Reserve does not act on these anxieties—should be good for gold.

A rising oil price will also raise questions over the recycling of petrodollars earned by the likes of Russia, Algeria, Nigeria and Iran.

As such countries are unlikely to just sit on a currency that is subject to US government control, might they exchange it for assets like renminbi bonds and gold?

A more technical reason is the looming adoption of Basel III rules that aim to make banks fund long-term assets with long-term money, and so avoid liquidity mismatches that helped spur the 2008 crisis.

In theory, this sounds great but in practice the new rules oblige gold traders to keep a “required stable funding factor” of 85%.

This will take effect in Europe by the end of June, and in the UK at the start of 2022, and will effectively kill Europe’s gold paper market.

The rules may still change before these deadlines, yet with a Damocles sword hanging over the gold paper market, it would take a brave soul to keep a naked-short position on gold today.

And given this regulatory threat, most banks will likely curtail their precious metal trading operations in the coming weeks, creating a situation where volumes are reduced, yet demand is rising due to higher inflation, positive momentum and falling cryptocurrencies.

Putting it all together, the odds thus seem skewed towards precious metals being the next “rolling bubble”.


DISCLOSURE: This material has been prepared or is distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Any opinions, recommendations, and assumptions included in this presentation are based upon current market conditions, reflect our judgment as of the date of this presentation, and are subject to change. Past performance is no guarantee of future results. All investments involve risk including the loss of principal. All material presented is compiled from sources believed to be reliable, but accuracy cannot be guaranteed and Evergreen makes no representation as to its accuracy or completeness. Securities highlighted or discussed in this communication are mentioned for illustrative purposes only and are not a recommendation for these securities. Evergreen actively manages client portfolios and securities discussed in this communication may or may not be held in such portfolios at any given time.

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