Our July End of Month Report
The numbers for the month are conclusive enough to suggest that inflation is creeping into markets. We can see soft commodities up from 5-10% with some exceptions and so the effect is light and we should keep an eye on this for the coming weeks and months.
Silver has obviously had a great run, which looks like a renewal of the gold:silver ratio. This implies gold is being sold (suppressed) to support silver. Hitting that trade the opposite way could bear great fruit the next fortnight, there is not any great reason why the gold:silver ratio should be treated with this level of respect at the moment.
VIX is lower over the month, as expected. We think that risk-off weakness will be diverted to USD weakness (the S&P500 is more or less unchanged for the month if we bring in the weakness in U.S. dollars, and is 5% lower for the month if we price it in gold.)
So with that implied weakness priced into markets, there is no real reason for equity markets to sell-off and volatility to come back.
The trade has been sell volatility, buy commodities, buy gold, buy bitcoin. Equities can be traded to stop-out short positions and to fade moves lower, but are an inefficient use of capital if our thesis is correct that they will rally in a limited way that is outperformed by the loss of USD and gain of gold.
We are a little more suspicious on the prospects of oil than other commentators and expect that there are some great long-squeezes to be had in the asset for the next 3 months..
Tech stocks have been on a tear, but the Nasdaq declined 3% when priced in gold.
With weakness in the U.S. dollar and bids coming into gold, silver and bitcoin probably the most significant events of July, Jerome Powell gave a speech late in the month (Thursday 30th) that sounded like a steady-as-she-goes approval of what had been happening in markets up until that point. Given the movement in the U.S.D. we take this as approval of dollar weakness.
China had spent months on the offensive with their world-warrior diplomacy foreign policy and have been remarkably quiet since the military incident at the Indian border. If wolf-warrior diplomacy was a tactic to sure up domestic support for Xi by generating nationalistic tendencies then some perceptible change may be occuring on that front.
During the last week of the month tech stocks produced some extraordinary results while facing anti-trust proceedings. The US has spent significant time and resources into progressing with anti-trust action against tech stocks. Given the political nature of their origin (Twitter, Youtube, Google and Facebook are seen to be involving themselves in the political process), investors should presume that investigators have serious outcomes in mind
Bitcoin had been appreciating over the month and becoming more volatile in the process. We should presume that some of this will stay with us in August. There is a question of whether Bitcoin miners will lock in supply at a particular price
Volume picked up in the last week of the month, after all-time low volumes In the first 3 weeks.
Bitcoin volatility began to increase with volumes late in the month.
Dominance has decreased over the month overall.
At this stage, the trade towards money (selling U.S. dollar and buying gold, bitcoin and TIPS) may have hit a peak in the short term.
Gold had had a very strong July, as previously discussed and is expected to continue.
With the moves over the last month, the U.S. dollar vs gold move begins to look a lot more like two assets that are the inverse of each other.
Written By: Thomas Kuhn, CFA
Thomas is a 12-year veteran of financial markets working to bring digital assets into the fold of traditional financial markets. With an interest in fundamental analysis with a technical overlay, Thomas actively takes positions in the markets he covers.
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