Monday, January 13, 2014
“It is hard to deny that there is at the very least asymmetry in the above chart with regards to each respective rate cycle (trough to new lows). The present cycle (approximately 70 years) is actually following the greatest degree of symmetry – likely because of the historic spike in interest rates in the early 1980’s drawing out the trend. In both the previous cycles shown (~ 60 and 55 years, respectively), the final leg down is swift. However, once the previous cycle low was broken, rates tended to base for an extended period of time.“ Man Versus Nature – June 1, 2011
The fact – or rather – interpretation stands:
For all of its purported dislocative potential, the Fed’s historic monetary policies did very little to deviate yields from what has been a genuinely balanced and reflexive trajectory lower from the profound 1981 highs.
From strictly a structural perspective, yields had been following a declining trend line for several hundred years. The chart below only depicts the past ~ 140 years. Considering the market is running out of road on the downside and the relative symmetry of the broader interest rate cycle over the past 70 years, the mirrored trajectory would imply that rates would remain in a range for some time. As the charts depicts – and similar to asset cycle tops, yields trough over a much longer timeframe. In light of the mirrored move trajectory, extended – even by Fedspeak definition, may be a relative phrase.
What we expect to encounter this year and to which we spoke of in recent notes (see Here & Here) – is the unusual market environment where rates revert from an extreme, while another pulse of inflation moves higher through a broadening range.
Historically speaking, gold and silver have in the past always exhibited classic technical V shaped lows. The current structure – a W – indicating a retest of support, is very atypical. That being said, in relation to the yield and interest rate cycle since 1970, gold has never traded in this climate. Just as gold exhausted in the early 1980’s in similar fashion to interest rates (quick volatile reversal), we expect the troughing yield environment described before to put a floor under precious metals and push gold higher through the range.
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