GOLD, THE MOST HAVEN OF SAFE-HAVEN ASSETS?


The gold futures market performed as it should as a flight to quality vehicle in response to the conflict in the Middle East, while other flight-to-safety vehicles, including the interest rate market futures and the U.S. dollar have both very much underperformed.


Gold futures put in a spectacular performance since the Mideast hostilities first erupted on October 7. December gold futures advanced from a low of 1823.50 on October 6 to 2019.70 on October 27. However, in the same time period other traditional flight-to-safety vehicles barely reacted for more than a few days. Flight to quality buying took the December 30-year Treasury bond futures higher for only four days before a price reversal, which then took futures to their lowest levels since 2007 on October 23. This suggests investors believe some other fundamental may be at the root cause of the underperformance of longer-term U.S. Treasury securities.


Chart 1: 30-Year U.S. Treasury Bond Futures - Weekly SO WHAT IS WRONG WITH


U.S. TREASURIES? Could it be that the investment community feels something may be amiss with the U.S. Treasury note and bond market? Too much supply is increasingly becoming a major worry, and investors may have finally awakened to the size of the national debt and the speed with which it is growing. Total debt is approaching $34 trillion, which is up from $22 trillion as recently as 2019. To fund this debt the U.S. Treasury has indicated that it will sell larger offerings of debt in 2024 (Chart 1).


THE U.S. DOLLAR IS FIRM BUT UNDERPERFORMS


Source: QST Chart 2: U.S. Dollar Index Futures - Weekly


THE NEWS The hawkish Federal Reserve was the catalyst that pushed interest rate differential expectations to levels that caused traders to buy U.S. dollars, taking the greenback to its highest level in early October since December 2022. The U.S. Federal Reserve’s mantra of “higher for longer” has also underpinned the U.S. dollar.


Source: QST


However, the U.S. dollar, another traditional flight-to-quality vehicle, surprisingly barely moved on news of the hostilities in the Middle East. In fact, the high price that the U.S. dollar index futures reached took place on October 3, which was a few days before the Middle East eruption and has not even been tested until just recently. An anticipated boost for the U.S. dollar in light of geopolitical events was just not there when it should have been. This suggests the flight to quality status that the greenback has enjoyed may be fading (Chart 2).


14 | ADMISI - The Ghost In The Machine | Q4 Edition 2023


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