Interest rates are playing havoc with the gold market, but where is this going?
(Kitco News) – Since the pandemic hit the markets the worlds central banks and governments felt like they had no choice but support the markets and economies flooding it with cheap money in the form if QE or lending with ultra low-interest rates.
You can make your own mind up and decide if this causes a bubble or not but at the moment a repricing is taking place. Gold had a great run after the pandemic set in and moved from $1451.41/oz to hit an all-time high of $2075.14/oz. Since then the price has retraced and we hover around the $1800/oz level which seems to be fair considering the circumstances we find ourselves in.
The interest rates markets offer something gold doesn’t. That is the security of yield. If inflation is motoring ahead and you invest $1 mln in bonds you can now get 1.5% from a 10-year treasury bond. If you put the same amount of money in gold, you get the ultimate safe haven but you do not get the yield. Investors have been on the hunt for yield for a long time and now money markets are pricing in the fact that the Fed may have to taper or tighten monetary policy within a 2-10 year time horizon.
This makes absolute sense, if you feel stock markets are in a bubble and the companies in the US need to price in rising costs due to inflation and higher interest rates you will diversify.
Why choose treasuries over gold?. JP Morgan once said, “Gold is money and everything else is credit”. This is true more today than at any other time in our lives. If inflation does reach 2% (Fed target) and you are getting a 1.5% 10 yield your money is moving backwards over that period of time. The carry cost of holding dollars in cash could be even worse. Holding gold in your portfolio could be prudent as it has traditionally been used as an inflation hedge. The issue is that you are subject to price fluctuations and if the Fed does indeed decide to taper or tighten you could lose out.
Once this move has balanced out and found its fair value we could see gold move back to higher levels. At the moment the financial markets are getting used to the fact that the Fed may need to slow down as growth improves. We may well see bumper Q2-3 growth figures, but the cost of growth for business will be more. Also, do we really think the fed will stop pumping the markets with liquidity?. I think not, governments have committed to helping the economy and there is now a Democratic government in America. Let us take stock of the situation, in relative terms interest rates are still very low and if we see inflation push higher like many analysts are expecting gold could make a comeback.
(Gold candlesticks & US 10 year yields orange line)
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