Infographics: A Big Picture View Of Gold, US Treasuries, the USD and Uncertainty

 

Introduction

More important than the daily ups and downds of the Dow Jones, the S&P500 and the Nasdaq Composite is the big picture insights that can be gleaned from other asset classes such as the US Treasuries (Bonds) yield, the US Dollar, and the spot price Gold. Refer to the charts above.

US Treasuries Yields (data from FRED the Federal Resserve Bank of Saint Louis)

Theoretically Bond prices rise in an deflationary economic environment (i.e. their yields in % fall). Bond yields determine interest rates in an economy. So because demand for loans is low in slow economic growth conditions, interest rates charged by lenders e.g. banks fall, which means bond prices rise. This is because when interest rates fall, existing bonds with higher coupon rates (fixed interest payments) become more attractive to investors than newly issued bonds offering lower interest rates. This increased demand for the existing, higher-yielding bonds drives their prices up.  But our chart above shows that bond yields for 2,10, and 30 year US Treasuries are all climbing! This is because investors are wary of the unpredictability of the MAGA Administration and who knows what comes next amid the frequent  flip-flops by the MAGA Dictator. Could Bank of China and Central Bank of Japan and other investors worldwide be offloading the US Treasuries?

The rise in bond yields means in the immediate term there will be inflationary pressures (also because of disruptions to existing suply chains) even if it later turns into a recession. Lets see what the Fed can or cannot do.

US Dollar (USD Index data from FRED the Federal Resserve Bank of Saint Louis)

The strength of a country's currency reflects its economic strength. Young people might not remember a time not too long ago when you need SGD 3.60 to get 1 USD and about SGD 7.00 to get a Great Britain Pound. 

Actually, a country's currency refects not just its current economic strength but also its  economic and geopolitical power and influence as perceived by investors worldwide. However, for export-driven countries like Vietnam and China, they would prefer their currencies to not appreciate too quickly, while for Singapore which imports nearly everything it consumes, the MAS would ensure that the SGD stays strong.

In our chart above, the most significant feature is that in the 2008 financial crisis, the USD was a safe haven currency as its price rose. But in the 2020 pandemic the USD didn't seem like a safe haven. And in recent days as the Tariff trade war swung up and down, the USD is going down down down. Just a week ago 1USD was 1.34 SGD. Now its coming to 1.32 and still dropping.

Gold (data from World Gold Council)

 Gold is indeed a flight-to-safety asset class as you can see by the captions in the Gold price chart above. But what is important is that the slope of the increase in price is the steepest as compared to the 2008 Financial Crisis and the Covid-19 pandemic. Which means that the level of uncertainty is the highest ever. 

The Uncertainty chart below uses data by www.policyuncertainty.com the people who invented the Index. For its methodology please visit their website. 

Note that Singapore's Uncerainty Index level is the highest-because it is the most open economy as compared to USA and China. And note that China's index level is the lowest and dropping while the US Uncertainty level is rising. Which means that there is confidence that eventually it will be the US that is the loser in this trade war.