BNY Mellon: The Aerial View: A Warning Sign?

BNY Mellon: The Aerial View: A Warning Sign?

By Simon Derrick, Chief Currency Strategist, BNY Mellon

Back in the summer of 2008, one of the clearest warning signals that something might be awry in the global economy came from the commodity complex. On the face of it everything appeared to be rosy. NYMEX crude was up 109% y/y while the CRB Index had gained nearly 50% over the same period. However, some curious warning signs were starting to reveal themselves.

Reports began to emerge from the US that the start of the driving season in May had seen the third largest y/y drop in miles driven in 66 years. Elsewhere, the Baltic Dry Index stood close to 30% down from its May peak while a number of staples including corn and soybeans were also under significant downward pressure.

While hardly an indicator of what was to come in the months ahead, these declines did provide an early indication of a global economy that was slowing rapidly.

Perhaps the most interesting of all these moves proved to be that of gold. Thanks to USD weakness over the previous seven years, it had more than tripled in price by 2008.

Following a number of warnings about asset price stability, however, and clear indications that the US economy was slowing, downward pressure began to build on bullion. Between July 15 and the collapse of Lehman Brothers on September 15, the price of gold against the USD had collapsed by 23% (and would ultimately end up losing 33% peak-to-trough that year).

Why does this matter today?
On the face of it, one of the prime focuses for the market at present is the question of inflation, given that CBOT 10-year Treasury note futures prices remain under pressure (the continuation chart shows prices having broken the post-1982 uptrend) and Brent crude prices are challenging the USD 80 a barrel level.

Beneath the surface, however, something else might be happening, given the increasingly anemic performance of gold since mid-April. Having come close to regaining the January peak on April 11, the price of gold has found itself coming under increasing pressure as both 10-year Treasury yields and oil prices began to pressure higher.

At first there didn’t appear to be a particularly close link between the three moves. However, over the course of this week the moves appear to have become rather more synchronous, with the sharp fall in the price of gold on Tuesday matching the sharp rise in 10-year yields above the 2014 high and the price of Brent crude making a surge towards the USD 80 a barrel level.

Equally, a period of consolidation in oil prices and Treasury yields over the course of the New York morning yesterday was matched by some stability returning to the gold price.

It’s perfectly possible that the increased synchronization between the three markets is pure coincidence. However, it’s also possible that the moves seen in the price of gold are a warning about the potential economic impact of rising oil prices and Treasury yields (and, for that matter, a stronger USD).


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