News

Behavior of Inflation and Bond Yields Seems… Contradictory

July 29, 2021 (Investorideas.com Newswire) The bond yields dropped despite surging inflation. It’s not a usual thing on the market, so we have to ask: what does it mean for gold?

The markets hide many mysteries. One of them is the recent slide in the long-term bond yields. As the chart below shows, both the nominal interest rates and the real interest rates have been in a downside trend since March (with a short-lived rebound in June). Indeed, the 10-year Treasury yield reached almost 1.75% at the end of March, and by July it decreased to about 1.25%, while the inflation-adjusted yield dropped from -0.63% to about -1%.

image

What’s intriguing, this drop happened despite the surge in inflation. As you can see in the chart below, the seasonally adjusted annual CPI inflation rate surged to 5.3% in June, the highest level since the Great Recession. Even as inflation soared, the bond yields declined.

image

Why is that? Are bond traders blind? Don’t they see that the real interest rates are deeply negative? Indeed, the TIPS yields are the lowest in the history of the series (which began in 2003), while the difference between the nominal 10-year Treasury yields and the CPI annual rates is the lowest since June 1980, as the chart below shows.

image

The pundits say that the decline in the bond yields suggests that inflation will only be temporary and there is nothing to worry about. This is what the central bankers repeat and what investors believe. However, history teaches us that the bond market often lags behind inflation, allowing the real interest rates to plunge. This happened, for example, in the 1970s (see the chart above), when the bond market was clearly surprised by stagflation.

Another issue here is that the central banks heavily influence the bond markets through manipulation of interest rates and quantitative easing, preventing them from properly reacting to inflation. Actually, some analysts say that the bond market is the most manipulated market in the world. So, it doesn’t have to predict inflation properly.

Implications for Gold

What does the divergence between the bond yields and inflation imply for gold? Well, as an economist, I’m tempted to say “it depends”. You see, if inflation is really temporary, it will start declining later this year, making the real interest rates rise. In that case, gold would suffer (unless inflation decreases together with the pace of economic growth).

It might also be the case that the divergence will narrow as a result of the increase in the nominal interest rates. Such a move would boost the real interest rates and create downward pressure on gold.

However, if inflation turns out to be more persistent than expected, investors will fear an inflation tail risk, and they will be more eager to buy gold as an inflation hedge. As I’ve explained, the decline in the bond yields doesn’t have to mean low inflation expectations. It may also indicate expectations of slower economic growth. Combined with high inflation, it would imply stagflation, a pleasant environment for gold.

Another bullish argument for gold is the observation that the price of gold has recently lagged the drop in the real interest rates, as the chart below shows. So, it might be somewhat undervalued from the fundamental point of view.

image

However, given the upcoming Fed’s tightening cycle and the record low level of real interest rates, I would bet that the above-mentioned rates will increase later this year, which should send gold prices lower. But if they rise too much, it could make the markets worry about excessive indebtedness and release some recessionary forces. Then, the current reflation could transform into stagflation, making gold shine. So, gold could decline before it rallies again.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though 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 up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

More Info:

Investorideas.com Newswire

This news is published on the Investorideas.com Newswire – a global digital news source for investors and business leaders

Disclaimer/Disclosure: Investorideas.com is a digital publisher of third party sourced news, articles and equity research as well as creates original content, including video, interviews and articles. Original content created by investorideas is protected by copyright laws other than syndication rights. Our site does not make recommendations for purchases or sale of stocks, services or products. Nothing on our sites should be construed as an offer or solicitation to buy or sell products or securities. All investing involves risk and possible losses. This site is currently compensated for news publication and distribution, social media and marketing, content creation and more. Disclosure is posted for each compensated news release, content published /created if required but otherwise the news was not compensated for and was published for the sole interest of our readers and followers. Contact management and IR of each company directly regarding specific questions.

More disclaimer info: https://www.investorideas.com/About/Disclaimer.asp Learn more about publishing your news release and our other news services on the Investorideas.com newswire https://www.investorideas.com/News-Upload/ and tickertagstocknews.com

Global investors must adhere to regulations of each country. Please read Investorideas.com privacy policy: https://www.investorideas.com/About/Private_Policy.asp

Follow Us on StockTwits

What's your reaction?

Excited
0
Happy
0
In Love
0
Not Sure
0
Silly
0

You may also like

Leave a reply

Your email address will not be published. Required fields are marked *

More in:News