Cash, Bonds and Gold

(Kitco News) – Since the beginning of May when April US employment printed weaker than expected, gold has declined, stocks have gained and Fed tightening expectations have increased. It appears the marketplace is expecting May data to offset April. Or, is US employment data becoming less relevant, similar to the widely revised GDP measures? As we get the first read on US employment data for May, it is important to focus on what the markets might be telling us. This presidential election is likely to be strongly influenced by the markets. A declining stock market coinciding with economic slowdown is more likely to result in a president Trump, more of the same – a president Clinton.

Against the consensus investments have been outperformed in this tightening cycle. Investors who have been overweight cash, US Treasury bonds and/or gold have generally outperformed since the Fed tightening on December 16th. Gold is up about 13% since December 16th, US Treasury bonds are up about 10% (as measured by the TLT ETF) and cash is up for the first time in history, when measured against negative interest rates in Europe and Japan. For those seeking what is different this time – voila. The stock market, as measured by the SPY ETF, is up 2.5%. The shift towards an extended period of below historical average market returns appears to have accelerated since the initial tightening. But what then, if US Treasury bond yields catch up to the rest of the world? The US 10yr note is currently yielding 1.8%, compared to 0.1% in Germany and 1.3% in the UK. Even Spanish and South Korean 10yr notes yield less than the US.

Markets Vs. Experts – Maybe most investors will get lucky and the US will lead the rest of the world back to some true expansionary inflation. US Treasury bonds should be the first go-to indication of inflation. They continue to indicate the opposite. Treasury securities are the foundation of basic performance for all investments on the planet. Along with gold, most experts have recommended against purchasing US Treasury bonds the past few years, notably coinciding with tapering of QE3 in 2014. The fact that the majority of experts have been wrong is a clear signal something is clearly different this time. Investors are advised to position accordingly. Until proven wrong by some sustained losses in US Treasury bonds and/or gold sustaining below $1,100/oz., overweight portfolio positions in gold and/or US Treasury bonds appear to be simply prudent.