USD, Gold and Bond Yields
A common question of late is "Why, with a rising yield curve and rising long term interest rates - which usually go hand in hand with inflation fears - is gold relatively weak compared to stocks and some commodities?" I believe that secular changes occurred in 2001 (bull market in gold, a bear market in USD, a bear market in bonds and a bear market in stocks when measured in gold as opposed to funny munny) but over the last year we have witnessed a challenge to that idea; a challenge that comes in the form of various assets and markets outperforming the yellow metal. To that I say all things must have their day and I have little doubt that the day will soon return when this adjustment in the fabric of reality has run its course.
But in the meantime, we look for answers as to why gold is not responding as it did in 2001 when short term interest rates tanked vs. long rates and savers were punished mercilessly in favor of asset owners and casino patrons of all stripes. There are many valid theories out there. Can it be any other way in a global market arena with so many moving parts and so many apparent contradictions? I will not draw a conclusion here. I simply want to show a chart of the USD and its relationship to the yield curve and gold.
As in 1995, the current as yet modest upturn in the 10yr/3mo. yield curve is accompanied by weakness in gold which is far different from the secular upturn that occurred in 2001. A common denominator is a desperately weak USD whereas 2001 featured a secular change from the 'strong Dollar policy' illusion. With 10 year rates currently looking as if they will follow 30 year rates into a secular upturn (after current consolidation from 'over bought' plays out) I believe the big picture could not be more bullish for gold. But in the short run, there is the precarious situation of the Dollar, still residing just above mega support. Gold sees this and continues to consolidate its secular gains of the 21st century.
This picture argues for continued caution as the process plays out. The Dollar will not be summarily executed for all to see. At the least this will be a grinding and painful period as gold aligns for the next leg in its secular bull market. I believe the chances are strong that the Dollar will only be devalued from a higher level than it resides at today. It has likey either bottomed or will do so after a final decline to major support as interest rates moderate (read: consolidate in the short term). But to investors in true secular trends, the process is all noise. The advice remains the same; manage short term risk, keep an eye on the biggest of pictures and consider that in the markets all things happen as they 'should' in due time.
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