Unusual Synchronicity Among Asset Classes



By Chinedu Okoye
25 October, 2023


Summary:

 • Crude Oil and the USD, and Gold and Treasuries, are showing unusual synchronicity in their movements.

 • Rising interest rates push yields higher, making Gold less attractive, while high Oil Prices are often dampened by a strong dollar.

 • BRICS demand and gold-backed bonds from China as Treasuries experience a sell-off due to central bankers' commitment to a higher interest rate era.

 • The US Dollar has outperformed its peers in 2023, mainly even as BEICS nations attempt reducing reliance on the dollar.


Certain asset classes that are traditionally inversely related appear to be moving in similar directions. Crude Oil and the USD, as well as Gold and Treasuries – especially the last two – are usually not allies. 

Rising interest rates tend to push yields higher, making Gold less attractive. Similarly, high Oil Prices tend to be dampened by a strong dollar.Today, we see inflationary pressures impacting Treasury yields, a surging dollar, and higher gold prices.


Discussing these assets price moves:

A brief assessment of Gold futures, the DXY (Dollar Index across a basket of currencies), Treasury yields (represented by the yield curve showing 2yr, 5yr, 7yr, 10yr, 20yr, and 30yr yields as a proxy for global yields), and Brent Crude is presented, along with remarks on the fundamentals behind recent price movements.


Gold:

Gold has risen to $1970.87 this month, marking a 2.10% increase after dropping as low as $1829.01. BRICS demand for the yellow metal and the issuance of gold-backed bonds by China coincide with this rise. 

The sell-off in Treasuries also leaves more cash for investors seeking a safe haven asset like gold.National and safe haven demand for gold can keep the metal around these levels, with strong dip buying opportunities on the way as it is currently below its 200-day moving average of $1972.77.


Source: Investing.com


Treasuries:

The chart below depicts the yield curve from a week ago, as per Bloomberg. Currently, the 2-year yield is at 5%, the 10-year yield at 4.864%, and the 30-year yield at 4.987%. The sell-off comes as central bankers have reiterated a commitment to a higher interest rate era in the past weeks. 

With some calls for a review of the 2% inflation target, investors are in a wait-and-see mode, creating a rare opportunity for institutional investors. Treasuries are seen as a compelling choice at these levels.

Source: Steno Research, Bloomberg and Macrobond



US Dollar:

The greenback has outperformed its peers in 2023 so far, with the DXY at 106.184. It has maintained a sideways trend this month, adding just +0.83%. This comes as BRICS nations have been reducing their reliance on the dollar in favor of their local currencies.

Source: Investing.com



Crude Oil:

Here, three charts are presented for weekly, monthly, and year-on-year periods. All three timeframes show wild price swings and overall sideways movements.

Weekly:

The commodity has fallen from as high as $93.60 to the $88 level in the past week.

Source: Investing.com


Monthly:

There's been a downward trend from a high of about $92.40 to the current level of $88.24, based on the data obtained.

Source: Investing.com

Year-on-year:

A downward-sloping trend line can be observed with significant price swings below the current level.

Source: Investing.com

General remarks:

The fundamentals behind gold, driven by national (central bank) demand and safe haven demand, may keep the metal in the 1800s range. 

Technical traders can find strong dip buying opportunities along the way. The US dollar has remained strong, but the moves to de-dollarize have gained momentum as the producers of 31% of global oil attempt to enforce local currency purchases and trade within them. 

A successful global adoption of the combination of Rupees, Yuan, and Roubles for oil sales to BRICS and non-BRICS countries presents a long-term challenge. Absent a recession, Brent Crude prices are expected to stay at or slightly above current levels, with looming geopolitical risks adding to price pressures. 

DISCLAMER:
THE ARTICLE IS FOR ANALYTICAL PURPOSES ONLY AND ARE PURELY OPINIONATED I AM NOT INVESTED IN ASSETS WITH ANY OF THE COMMODITIES/CURRENCIES MENTIONED AND THIS IS NOT INVESTMENT ADVICE.

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