BOND MARKET TELLS REAL STORY
While everyone else twiddles their thumbs and waits for the next missive from the Federal Reserve, the bond market has spoken loudly and clearly about the near-term (and, possibly long-term) direction of interest rates.
Interest Rates
Gold And US Treasuries – Punctures In The Everything-Bubble
GOLD AND US TREASURIES
The price of gold early Friday morning this past week touched $1720. At that level it was down $350 per ounce from its high point of $2070 last August.
The size of the decline is not unusual at face value. But, in light of the expectations for hugely higher inflation rates and much higher gold prices that have dominated the headlines over the past year, the drop might signal a cause for concern among gold bulls.
Meanwhile, eyes are fixed on interest rates for US Treasury bonds. During the same six-month period (August 2020 – February 2021) during which the price of gold fell by seventeen percent, the price of the 20-year US Treasury bond fell by twenty percent. That IS a huge deal, as it corresponds to sharply higher interest rates from less than 1% last August to as high as 2.26% just the other day.
The rush to proclaim correlation between interest rates and gold has resumed. Also, warnings and predictions of much higher inflation from around the globe are increasing.
As we have said on several occasions, there is no correlation between gold and interest rates (see Gold And Interest Rates – There Is No Correlation).
This can be seen on the charts below. The first chart (source) is a history of gold prices over the past fifty-six years and the second chart (source) is a history of interest rates over the same time period…
GOLD PRICES 1965-2021
10 YEAR US TREASURY RATE 1965-2021
During the 1970s, the price of gold rose from $40 per ounce to an intraday peak of $850. All throughout that time, the interest rate on the 10-year US Treasury bond rose higher and higher; from approximately 4% to 12.5%.
However, during the years 2000-2011, while the price of gold rose from $250 to $1900, interest rates on the 10-year US Treasury bond dropped from 6% to 2%.
The two decade-long periods provide contradictory results for the argument that lower interest rates are correlated to higher gold prices.
And for those who argue that the higher rates we are currently seeing are an indication of significantly higher inflation, then why is the gold price declining?
The higher interest rates are possibly a market reaction to the brutal effects of infinite credit creation and interest rate manipulation by the Federal Reserve.
The entire world economy is funded with cheap credit and most economic activity is dependent on it. The prices for all financial assets misrepresent and grossly exaggerate any underlying fundamental value.
Higher rates might trigger a credit collapse so severe that any asset could decline in price by fifty percent or more.
As for gold, it would also decline – to a level commensurate with whatever strength the US dollar attains.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
A Lesson About Gold – How Bullish Can It Be?
A Lesson About Gold
Apparently, there is no limit. This seems especially true right now with all of the “obvious” signs and indicators staring you in the face. It is almost blasphemous to speak cautiously. Better to let your imagination run wild and join in the revelry.
I can’t do that. I don’t choose to be dumped into the same cauldron of boiling fantasy with other analysts and advisors, who tout and promote based on the latest headlines. There has to be more to it. I think there is.
Investors Act Like Spoiled Children
When a small child wants some candy or a treat, they usually ask for it. When they don’t get it, they might throw a temper tantrum. They might also throw a tantrum when they want more: more candy, more dessert, etc.
Gold And Interest Rates – No Correlation
GOLD AND INTEREST RATES 2001-11
Over and over again, the following statement or something similar continues to find its way into commentary about gold:
“…prospects of higher US interest rates have the ability to limit upside gains. It must be kept in mind that Gold is a zero-yielding asset that tends to lose its allure in a high-interest rate environment”
A variation of that statement:
“Because gold doesn’t bear interest, it struggles to compete when interest rates rise.”
The statements imply a correlation between gold and interest rates. And the implied correlation suggests that higher interest rates result in lower gold prices.
If that is the case, then there should be some historical precedent to corroborate the correlation. There is. And we only need to go back a few years or more to find it. But it does not corroborate the correlation; it refutes it.
During the ten-year period 2001-2011, gold’s price increased from $275.00 per ounce to a high of nearly $1900.00 per ounce. And interest rates continued their long-term decline throughout that entire period.
In this example the original correlation is inferred to be supported by the opposite scenario – lower interest rates and higher gold prices. So far, so good.
GOLD AND INTEREST RATES 1970-80
However, let’s go back a bit further along the time line. Between 1970 and 1980, the price of gold increased from $35.00 per ounce to $850.00 per ounce. But rather than declining, interest rates were on a tear.
Rather than “struggling to compete” gold was galloping ahead in the face of ever higher interest rates and increasing lack of demand for higher-yielding investments.
The higher rates were a reflection of lower prices for bonds and particularly U.S. Treasury securities. The 10-year U.S. Treasury bond yield exceeded 15%. Which makes you sort of wonder when you read something like this:
“Higher rates boost the value of the dollar by making U.S. assets more attractive to investors seeking yield.”
Two ten-year periods of outsized gains in the price of gold. And interest rates were doing something exactly opposite during each period. There simply is no correlation between gold and interest rates.
Additionally, there is no correlation between gold and 1) social unrest, or 2) global terrorism; or 3) world wars. Gold is not a safe haven hedge and it is not an investment. It is real money.
WHY DOES GOLD PRICE CHANGE?
But is there something that correlates with gold? Anything at all? Why does its price change? And so dramatically, it seems?
With respect to gold and its price changes, there is only one thing that correlates. The U.S. dollar.
The U.S dollar is a substitute for gold. Gold is original money. The price of gold is an inverse reflection of the changing value of the U.S. dollar. The ongoing, never-ending deterioration of the dollar’s value means ever rising gold prices over time.
Gold is the standard; not the U.S. dollar. Gold has earned its designation as real money over five thousand years of history. It is original money. And it is real money because it is a store of value.
And there is historical evidence to support the correlation of gold’s price to the value of the U.S. dollar. Every change of significance in time and price for gold correlates with an inverse change in the value of the U.S. dollar. Higher prices for gold correlate with a lower value for the U.S. dollar. Lower gold prices correlate with stability and strength for the U.S. dollar.
The correlation between gold and the U.S. dollar is implicit. One does not ’cause’ the other. Either one is the inverse of the other.
Some have said that the argument about correlation of interest rates and gold depends on making a distinction between real interest rates and nominal interest rates. No correlation there, either.
That is because any patterns that appear to confirm correlation between real or nominal interest rates and gold need to include the U.S. dollar. The U.S. dollar is the determining correlative factor re: gold.
Without taking into account the relative strength or weakness of the U.S. dollar relative to gold’s price, any other correlations are either meaningless, misleading, or contradictory.
There are six major turning points (1920, 1934, 1971, 1980, 2001, 2011) on the chart (source) below. All of them coincided with – and reflect – inversely correlated turning points in the value of the U.S. dollar…
Gold Prices: 100-Year History
The U.S. dollar is the world’s reserve currency and gold trades are settled in U.S. dollars. Since gold is priced in U.S. dollars and since the U.S. dollar is in a state of perpetual decline, the U.S. dollar price of gold will continue to rise over time.
There are ongoing subjective, changing valuations of the U.S. dollar from time-to-time and these changing valuations show up in the constantly fluctuating value of gold in U.S. dollars. (read more here)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
Gold And Interest Rates – A Mass Of Confusion
Over the past several months there have been numerous articles referencing a relationship between gold and interest rates. Most of them are well-meaning attempts to convey information about recent changes in the markets as interest rates head higher.
In several instances, however, the author(s) have tried to explain a ‘perceived’ correlation between rising interest rates and the value of the US dollar – in a very positive manner. And they have imputed a similar correlation – albeit negative – in other statements with respect to Gold. In both cases they are incorrect.