President Donald Trump must believe that the war will be over soon. The White House announced today that he will meet with Chinese President Xi Jinping in Beijing on May 14 and 15. The Iranians responded to Trump's 15-point peace plan today with a list of five conditions, according to Press TV, including reparations, sovereignty over the Strait of Hormuz, and no more assassinations. Interestingly, they didn't claim a right to nuclear enrichment or ballistic missiles. Let's review how the financial markets have been reacting to the war so far:
I. Gold
Everyone is wondering why the price of gold plunged 16% from its record high on Monday, March 2, a couple of days after the war started, through March 23 (chart). It should have gone up on the worsening inflation outlook and mounting geopolitical risks. These are usually bullish developments for gold and should remain so. Perhaps traders perceived that the war would boost global weapons spending, but weapons makers invoice in dollars, euros, and other currencies, not in gold. The war also boosted the dollar's foreign-exchange value, making it a better safe haven than gold.
Then again, prior to its price plunge, gold was seriously overbought relative to its 200-day moving average and its upward-trending channel (chart). A lot of leverage had entered the market over the past several months. Gold recently found support on an intraday basis at its 200-day moving average. It may retest that, but the uptrend should resume. We might have overreacted last week by cutting our year-end target from $6,000 to $5,000. In any event, we remain bullish on gold and maintain our $10,000 target by the end of 2029.
We've previously observed that there are no valuation models for gold because it does not generate any income stream that can be discounted. We are relying on the following "model," which shows that while gold has an inverse relationship with the S&P 500, the two have the same long-term trends (chart). We are projecting 10,000 for the S&P 500 by the end of the decade and reckon that portfolio diversification will cause rebalancing into gold (and other assets, of course). That's how we get to $10,000 gold by the end of the decade.
II. Oil
The price of a barrel of Brent crude oil might have peaked at around $120. The Iranians are letting oil tankers pass through the Strait as long as they aren't operated by their enemies. The Saudis are using pipelines to the Red Sea. The Commitments of Traders data are showing that oil producers are shorting the commodity to lock in the current price (chart).
The oil price is expected to fall less over the next 3, 6, and 12 months because it has been falling recently (chart). Brent is currently priced slightly below $100 a barrel.
III. Stocks
The S&P 500 has held up quite well during the war so far. Our favorite Bull/Bear Ratio fell to 1.57 last week, which is bullish from a contrarian perspective (chart). Last year, it bottomed at 0.66 on April 28, 19 days after Trump postponed Liberation Day. On Monday, he postponed Obliteration Day.
IV. Bonds
The 10-year US Treasury yield has risen sharply since the war started as the odds of a Fed rate cut has plummeted with more chatter about possible rate hikes in response to the inflationary consequences of the war (chart). Nevertheless, the yield remains in the range that we consider to be normal, i.e., 4.25%-4.75%.
