As a gold investor, there are many factors to consider when buying the precious metal. A gold investor needs to understand the macroeconomy, as the gold market is influenced by global events. These global events spark fear, greed, and pessimism, which affect capital markets until central banks step in. Hong Kong, Turkey, China, Chile, Venezuela, and many others have economic issues that put the currencies at risk. Currency fluctuations inhibit natives’ ability to buy ounces of gold. Currency pressure makes it tougher for gold accumulation as currency depreciation accelerates. Gold remains constant while fiat currency races to zero. Riots in Hong Kong led to bank runs. Bank runs led to capital controls and precious metal shortages. Dealers reported backlogs of several weeks until the metals came in.
Bonds Are Not A Safe-Haven
The global slowdown and accommodative monetary policy for most of the world’s banks have caused the metal to reach all-time highs in 70+ currencies globally. More and more investors are realizing that bonds are not a safe haven like they advertise. The German yield curve is entirely negative, and as real rates have risen slightly, the prior cycle high of negative $17 trillion in bonds has moved up to negative $13 or $14 trillion. Inflation is looking like it will tick up in the next couple of quarters, as real rates look like they will continue to fall into negative territory. Negative real rates are wildly bullish for gold. How exactly do real rates affect gold? Well, those who say gold does not pay a dividend are categorically wrong.
Rates & Gold
If you ask that question to every person who owns gold in 73 countries where their currency has depreciated against gold, what do you think they would say? Every time a central bank cuts rates and weakens the currency, does that not place a dividend payment in your hands? If you are a dollar-cost averaging type of person, gold appreciation is like a dividend. Real rates are one of the biggest factors that affect gold. Real interest rates are the nominal interest rate minus expected or actual inflation. Gold hit $1,566 on September 4, 2019, meanwhile the 10-year bond hit 1.431. That is no coincidence, as rates have everything to do with the price of gold. The correlation between real yields is near a perfect one-to-one ratio. As real yields go negative, gold prices move upward.
A great way to track this is to watch TLT, TIPS, and TNX. TIPS are inflation-protected securities and are designed to move opposite of real yields. Inflation has been flat recently, so inflation can be derived from nominal bond yields as TIPS. Essentially, TIPS prices move inversely to real yields. When real yields fall, TIPS rise, and vice versa. If you overlay gold and TIPS, you can see how they move together. As rates fall, TIPS prices go up and capital gains are made over the coupon. According to the charts on the U.S. Treasury website, real rates are 0.14.
When gold topped out at $1,566, real rates dropped down to -0.10. Negative real rates are coming down the pike, and the epic gold bull market can make people fortunes.
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