Golden BLS Revision

Gold surges, and this time it is not driven by a short squeeze. The “short interest” in the bellwether, GLD ETF, is at its lowest in five years, while asset inflows are rising. Investors seek out gold as an alternative to bonds, the dollar, and perhaps even equities. The latter has a case because gold stocks are trading at 8 to 13 times the index, which is trading at 22 times.

Gold remains cheaply valued, which attracts investors' assets that are increasingly positioning portfolios on a weakening US labor market, driving the Fed into a series of rate cuts. Gold is becoming a macroeconomic hedge against the risk of a significant future spike in the unemployment rate, following the BLS's release of benchmark revisions that span a wide range of -250 to -900K.

The range that wide means that the BLS revision could surprise as the historical range +/- 0.1% to 0.3% may be too narrow given the deterioration of the labor market.

The market is therefore not trading any stagflation or re-acceleration of inflation; instead, it is trading labor market weakness getting worse, which reinforces hedging with Gold for adverse macro outcomes.

Figure 1: Gold is not being driven by a short squeeze

Source: State Street

Such sentiment is fueled by the converging events of the unusual attention to the BLS benchmark revisions, and the Senate Banking Committee is set to vote on Stephen Miran’s Fed nomination this Wednesday.

The appointment could allow Miran to be confirmed by the Senate before September’s FOMC meeting, potentially adding to rate cut bets as Miran will skew the Fed’s hawk-dove scale to the left (more dovish), further weakening the dollar, now dipping down to 97 on the DXY Index.

As such is happening, gold indices are setting new highs. For example, the leveraged Nikkei Gold Index and the S&P/TSX Global Gold Index are getting into parabolic overdrive.

Historically, an acceleration in the momentum of gold indices (and proxies/alts, e.g., copper/silver +13% to +45% YTD) leads to new equity record highs with yields following, eventually, also higher.

Figure 2: Leveraged Nikkei Gold Index, and S&P Global Gold

Source: Nikkei, S&P/TSX

Near-term, investors may shrug off inflation until it shows broader pass-through, and a surprise jump of 0.5% in the month-over-month change in CPI. This has notably happened when Gold surged to highs such as in 2006-07, 2011-12, and 2018-19, which coincided with periods of uncertainty about the economy driven by labor weakness.

Thus, Gold as a macro hedge is sensible even though the asset does not pay interest or dividends, and its annualized volatility currently at 17 percent is higher than that of currency, equity, and bond volatility.

Suppose consumers are right, and the economy does exhibit an underlying stagflation, as seen from yesterday’s NY Fed survey of job prospects worsening and inflation uncertainty rising (Figure 3). In that case, Gold’s parabolic move has not yet reached its peak.

Figure 3: Consumers see stagflation

Source: New York Fed