We've talked about the reversal in the precious metals.
For gold, a technical reversal signal came on Friday when the CME raised margin requirements.
And then yesterday, gold had one of the steepest one-day declines of the past 45-years.
As we’ve discussed, margin increases have often been a common trigger, or fuel on the fire, behind those extreme one-day declines dating back to 1980.
Another common theme, deflationary forces. Even in these rare, extreme selloffs, the drag of deflationary forces on gold prices has outweighed the safe-haven feature.
With that, let's take a look at this very important chart.
This is the ratio of gold prices-to-oil prices. As you can see, we are at an historic extreme (the far right of the chart). The only more severe period was during the covid lockdowns, when oil prices went negative!
So, what is this telling us?
Well, while gold prices have gone parabolic (UP), oil prices have fallen 12% over the past month, breaking down from the low-end of a four year trading range.
The move in oil is not only a deflationary signal, but it's also a deflationary force. The persistence of low oil prices, and now this leg lower, will feed into headline CPI.
We know from real-time CPI inputs (like new and used cars, rents) that prices have been flat, and in some cases down. The government's report just hasn't caught up … yet.
With that, given the Fed's slow path to ease, real rates (Fed Funds Rate minus inflation) seem to be rising in the underlying economy (i.e. a tightening effect, as actual inflation may be falling faster than the Fed Funds rate).
And rising real rates have historically marked points of exhaustion for big gold runs.
All of this said, oil bounced sharply today (up about 4%) after the Energy Secretary said it was a good time to restock the Strategic Petroleum Reserve, and after the White House announced new sanctions on Russian oil companies this afternoon.
So, we may be seeing the first signs of a floor in oil — and with it, perhaps the first sign of a cap in gold (and the normalization of this ratio).
