Gold and the 10-year treasury note for the best part of the recent history have been inversely correlated. Whilst this isn’t always the case, it has shown in recent times to be a good benchmark. The yield on the 10-year treasury has been in a steady decline in the last few weeks and as of this morning (July 8. 2021) it dipped below 1.3 for its lowest level since February 2021. This is a 26% decrease from its April high when it touched 1.77. This is of extreme importance because it shows that investors are starting to realise two factors:
- The real yields given current inflation are – 3.7% and a total waste of an investment
- It would appear there is some yield curve control going on in the background.
The rate we saw the yield at the beginning of 2021 was comfortably below the psychologically significant round 1.0% figure and climbed at a rate of knots. What is happening right now, is the yields are falling off a cliff, and given the debt crisis and propensity for the stock market tantrum at the mere suggestion of interest rate hikes, it should come as no surprise that some kind of yield curve control has been silently taking place in the background. After all, the Fed can’t allow interest rates to go up knowing a repeat of previous stock market tantrums will ensue. It also helps the US in their debt payments, of course.
The Fed is controlling the entire US economy with their insatiable thirst to lead people down the wrong path and not allow fear to creep in. Powell and his team of monetary destroyers are still believed. He disclosed recently that the debt levels are not sustainable, and the economy still has a long way to go. With unemployment increasing, it would seem we really do. They are totally backed into a corner, with only a printer to get out of it.
So what does this mean for the yellow metal? The recent low of around 1750 has been significant in the bounce we have seen to sticking its head above the 1800/oz handle. This is the scene of the breakout of 2020 when we saw gold rally almost $300 in a matter of weeks. Holding this support level should open the door for another rally into the latter part of the year when gold is seasonally stronger.
The short term volatility we are seeing could be down to the rallying dollar (amongst some other well documented rules to have recently been imposed from Switzerland). Since the Fed announced they have no intention of increasing rates for another year and a half as a minimum in this ultra dovish stance the dollar got a big bid. Tapering wasn’t mentioned either, but this has somehow affected how investors believe the economy is recovering. Jobs data re-released shows unemployment rate at 5.9% which actually increased from the previous month. Dollar somehow has a rally. Inflation concerns? Not a problem the higher the rate, the more the dollar seems to rally, all based on the Fed’s narrative of inflation concerns sparking a rate hike. To be absolutely clear, the dollar is not strengthening, it is merely depreciating at a slower rate against its currency peers.
All is not lost however, as time has proven a rallying dollar and a gold rally can occur at the same time. It is also worth noting that when gold hit it’s all time high last year, the dollar index was at 93.3. A full point higher than it is now.
Data often takes time for investors and traders to fully digest. The current macro picture is stronger for gold than it has been since the late 1970s inflation period in our opinion. Once the world works out that stock markets are outrageously overvalued, the dollar is losing purchasing power at a rate of knots due to the levels of inflation which isn’t going to be transitory, the Fed can’t increase interest rates without collapsing the system, and sound money comes in physical assets then gold will have its long deserved moment. That moment should begin towards the end of the year and last for some time.
One more thing: Why are central banks continuing to load up on gold? Why did Russia just announce they are dumping dollars and buying massive amounts of gold every month? Why is China believed doing the same?
To be successful at building wealth, you follow the big money. Do what they do and not what they say.