How Long Can This Last?
Yields are rising. The global economy has adapted so far without any major problems. So far. But how long can this last? And what does it ultimately mean for the gold market?
Let’s look at the chart below. As one can see, the U.S. long-term interest rates have been rising since September 2017. And they breached 3 percent in the second quarter of 2018, attracting investors’ attention all over the world.
Chart 1: Gold prices (yellow line, left axis, London P.M. Fix, in $) and the 10-year U.S. Treasury yields (red line, right axis, in %) from January 2017 to May 2018.
However, although the recent moves in the 10-year yields are of great importance, higher short-term yields might also be problematic. Please take a look at the next chart, which paints 1-year and 2-year Treasury yields. They have also been surging recently: the 2-year yields have jumped above 2.5 percent, the highest level since 2008. For some analysts, the rally in short-term yields is even scarier, as they are more relevant in daily life of many consumers and investors.
Chart 2: Gold prices (yellow line, left axis, London P.M. Fix, in $), the 2-year U.S. Treasury yields (red line, right axis, in %), and 1-year U.S. Treasury yields (green line, right axis, in %) from January 2017 to May 2018.
Anyway, all interest rates have been rising, making many people nervous. Why are they worried? Well, higher interest rates mean greater costs for debtors. Consumers and investors have to pay more for their loans. The debt-service costs increase for companies, putting them in troubles. It’s no coincidence that practically all the Fed’s tightening cycles preceded the recessions.
Moreover, the Fed’s actions have important consequences not only for America, but for the whole globe. When the U.S. interest rates rise and the greenback appreciates, it implies problems for many emerging countries which are heavily indebted in U.S. dollar. Analysts estimate that households, companies and governments loaded up on $40 trillion of debt taking advantage of ultra low interest rates after the Great Recession. The recent crisis in Argentina (who can count them?) may be the canary in a coal mine, warning of the lethal effects of rising interest rates and a strengthening dollar on countries that depend heavily on foreign debt (remember taper tantrum in 2013?).
But should investors panic? No. We argue that rising yields indicate changing macroeconomic condition, not a doomsday scenario. Why? Firstly, the yields rose because the economy improved. The U.S. central bank has finally started to unwind its massive balance sheet and to hike the federal funds rate in response to healthier labor market and stronger overall economy.
Second, the interest rates have gradually marched higher – it was not a sudden jump. Just look at the chart below, which shows the 10-year Treasury yields since 1962. If you examine it closely, you will see that the recent rise in yields has been rather benign. Actually, you can barely notice that “deathly move” on a long-term chart. Instead, you can see that the 10-year yields jumped above 3 percent both in 2011 and 2014 – and the sky did not fall.
Chart 3: U.S. 10-year Treasury yields (red line) and U.S. 1-year Treasury yields (green line) from 1962 to 2018.
What does that discussion mean for the gold market? Well, we don’t have good news. Higher interest rates may be harmful for debtors (but creditors benefit), including emerging markets. However, what is really scary are the short and rapid changes, not long and slow interest rate increases. It means that – contrary to what the sellers of scary narrative try to peddle – the doomsday scenario is not likely in the near future. Hence, gold will not shine as a safe-haven asset during the allegedly upcoming bond market crash. And investors should remember that during emerging market crises, the U.S. dollar usually appreciates – which is clearly bad for bullion – as investors shift their funds into America.
But, hey, gold bulls, the case is not lost! The yellow metal also does not like high interest rates. During rapid moves, gold could plunge easily. But when interest rates climb steadily (as inflation remains limited), the shiny metal may stay afloat. It is similar to inflation: gold shines only during high and accelerating inflation, not during mild inflationary periods. The world is non-linear. Investors’ sentiment is non-linear. We don’t notice small price increases (or modest upward moves in yields), only huge and persistent inflation is able to pull us out of the comfortable numbness. However, rapidly appreciating dollar is a different kettle of fish… Stay tuned!
If you enjoyed the above analysis and would you like to know more about the link between rising yields and the gold market, we invite you to read the June Market Overview report. If you’re interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign me up!
Market Overview Editor
email: [email protected]
Hi, my name is Arkadiusz Sieroń. Call me a liar, but I am writing about the precious metals thanks to Arthur Laffer, Alan Greenspan, John Keynes and Fredrich Hayek. Really! Would you like to know how these economists, some of whom have been dead for a long time, triggered my adventure with gold?
When I was in high school, I took part in the Entrepreneurship Olympic, one of the biggest thematic competitions for pupils from secondary schools. During my preparations, I studied an academic textbook, in which I came across a Laffer curve. Eureka! If the tax revenues are the same at low and high tax rates, the government should lower them! I did not win the competition, but I achieved much more. I decided to become an economist! And I loved the idea of small government and economic freedom since that very moment.
After graduating from high school, I moved to the capital. I was very excited, as I started to study economics at the best economics university in the country. However, the professors disappointed me very quickly. Why? They all were statists, supporting extensive government intervention and fiat currencies. Gold? It is a barbarous relic! Have you not read Lord Keynes?
I was very depressed. I even considered giving up my studies in economics and enrolling in the Philosophy Faculty! You can see now that I was really desperate. When I was contemplating nothingness and vanity of vanities, a few of my classmates lent me a handful of fascinating books, such as Capitalism and Freedom by Milton Friedman. I also discovered the publications of the Austrian economists who supported the idea of the gold standard. It sounded crazy in the 21th century, but it was inspiring. I rediscovered the sense of studying economics.
I continued my studies and one day I read these words: “Gold and economic freedom are inseparable”. Try guess who wrote them. Don’t give up, try once again. Don’t know? Alan Greenspan. Shocking, right? This is a quote from his “Gold and Economic Freedom”, an article published in 1966. Several years before he became the Fed Chair, and several more before the real estate bubble, that he helped to pump, up burst. Quite ironic, don’t you think? Both his essay and the Great Recession (and the accompanying bull market) motivated me to study investment portfolio management and the precious metals.
I became a certified Investment Adviser very soon and I started to work for the biggest pension fund in the country. My corporate career seemed to be very promising. However, I quickly discovered that the company invested most of the participants’ funds into Treasuries or shares of the big state companies. And they didn’t even want to hear about investing in precious metals.
I quit. I found a shelter at the university, as a Ph.D. candidate and – after a defense of my thesis about certain negative consequences of inflation (i.e. the Cantillon effect) – as an Assistant Professor. I was finally free to study economics, freedom, and gold.
The more I read about gold, the more I was terrified. Most of the so-called experts who write about the precious metals, don’t have any idea about the subject they discuss. They treat gold as a mere commodity. Or they claim that gold is either worthless as it does not bring any yield or that its price should always rise. I was really let down by the state of understanding of the gold market among the analysts and investors. But I could not do too much. Until the sun shined down on me.
I got a job offer at Sunshine Profits. I didn’t hesitate a second and accepted it, although many professors discouraged me: “You are a scholar, focus on science and do not write silly newsletters about bullion" -they advised me. But I did not listen to them, as they clearly didn’t understand the nature of gold.
It is not a barbarous relic, it is the longest used money in history, and a clinking witness of human civilization. Gold is the asset, which used to serve as the safe- haven and portfolio diversifier for investors from the entire world for years. I wanted to study its properties and to share with my knowledge with people who do not have time for that. I wanted to help investors to better understand fundamentals of the gold market and improve their investment decisions. I’m happy that I can do that at Sunshine Profits. I’m really proud to be a member of our team and provide investors with high quality investment analyses about the gold market.
Would you like to check into how I can help you make the most of your precious metals investments? A great way to start is to simply sign up for our gold newsletter. In this way, you’ll stay up-to-date with my analyses and you’ll check to see if what I do can help you. Plus, it’s free, so all it takes to sign up is just a few clicks. Sign up today.
Thanks for taking the time to read my story. If you have any questions , please let me know using our contact form.
Arkadiusz Sieroń, Ph.D.