Over the past two weeks, ZeroHedge has chronicled another dramatic rise in the TED Spread. What does this mean and what might this portend for gold? Hmmm...those are excellent questions.
The latest post from ZH on this issue was published this morning and I strongly encourage you to review it before you go any further: http://www.zerohedge.com/news/2016-08-11/libor-blows-out-fresh-6-year-highs-28-trillion-debt-question-emerges
And what is the TED Spread? Here's a very simple and straightforward explanation from Wikipedia:
To simplify it even further...a higher TED Spread has, in the past, often been an indicator of short-term funding stress or credit risk. Again, from Wikipedia, this:
Here's a long-term chart of the TED Spread which shows the highs listed in the information above:
Obviously, spreads at present pale in comparison to historical extremes. However, note that we are currently seeing the highest spreads since early 2012 and, when you look at the three-year chart, the trend becomes a little more interesting:
So now the point of this post...
Have a look at this one-year chart of the TED Spread and be sure to note the dates we've placed upon it, December 31, March 30 and June 8:
Now have a look at a one-year chart of the S&P 500 with the same dates noted:
On balance, the two charts above make some sense when taken together. If the TED Spread is a measure of funding stress or credit risk, then it would follow that peaks in the spread would coincide with short-term peaks in the stock market. Historically we've seen this, too, with stock market drops in 1987, 2000, and 2008 that coincided with TED Spread peaks. As this situation resolves itself, a "flight to safety" during equity corrections leads to bond buying, which leads to lower interest rates, which ultimately leads to a return to tighter and smaller TED Spreads. So, could the current spike in the TED Spread be a precursor to another stock market drop. Yes, it certainly could. In fact, the chances range from possible to likely.
However, I'd like to point out something else that, for us, is far more important. Remember, the most likely way for the TED Spread to come "back into whack" is through falling interest rates. And, as we all know, falling interest rates prompt investors and HFT trading machines to bid up paper gold. So, when we look at the one-year chart of gold with the same December 31, March 30 and June 8 dates placed upon it, what do we see?
Look, this is not meant as some sort of forecast for higher gold prices over the next few days and, from a historical perspective, TED Spreads are still not all that high. However, there should be no discounting of the fact that the most recent TED Spread peaks led to temporary but stout equity market declines and sharp run-ups in the price of gold. For what it's worth, I'd be sure to keep an eye on the TED Spread as we go through August. If it and the stock market peak and begin to roll over, don't be surprised if gold (and silver) suddenly surge to new 2016 highs.