As financial markets sold this week, precious metals were dragged down into selling. The culprit, once again, was rising bond yields.
On Thursday, the 10-year Treasury climbed above 1.5%. Although still low on a historic range, the bullish momentum worries investors. Over the past seven months, the 10-year yield has tripled from a low of just 52 basis points.
The 10-year note serves as a benchmark for mortgage rates as well as risk premiums on the stock markets. The high price-to-earnings ratios of the S&P 500 are more difficult to justify in an environment of higher interest rates.
As we have noted, real interest rates are also a headwind for the precious metals markets. The key word is “real” – as in, after adjusting for inflation. And if inflationary pressures continue to grow, that may be all that is needed to push real interest rates deep into negative territory.
The Federal Reserve could also be on the verge of restarting Operation Twist. As part of this program, the central bank sells some of its short-term treasury bills and buys longer-term bonds. The goal is to drive down returns over the long term.
But when Fed Chairman Jerome Powell spoke on Thursday, he made no definitive commitment to launch Operation Twist or any other intervention to tame the bond market.
At one point, Wall Street may force Powell’s hand. Despite billions of dollars in COVID stimulus and more to come, the economic recovery is fragile with the risk of inflation rising.
Trend forecaster and guest here many times on our podcast, Gerald Celente, yesterday posted a video warning of what he calls “dragflation”:
Gerald Celente: And Powell didn’t reassure investors that central banks would continue to control bond yields and inflation expectations. What did we say about inflation? Just six months ago, in the Trends Journal, coined the term dragflation. The economy is slowing and inflation is rising.
Despite inflation showing up in oil prices and elsewhere in the economy, the gold and silver markets don’t really reflect this reality right now and have had a really tough week.
On the positive side for gold and silver bulls, the selloff in precious metals mining stocks did not gain further downward momentum this week. In fact, the GDX Gold Miners Index showed a slight gain until the close on Thursday.
If gold and silver stocks continue to show relative strength to broad market averages, that would bode well for the precious metals themselves.
It’s been several months since a fear trade took hold of Wall Street. But with stocks showing vulnerability and bonds not serving as a good counterweight, precious metals may start to look more attractive to more investors as an alternative asset class for portfolio diversification.
Bullion dealers, including Money Metals Exchange, have seen their buying activity increase in recent weeks, especially for silver products. However, the sentiment of those who trade futures and exchange traded commodities is a whole different story.
The paper gold markets have not yet recovered. According to the World Gold Council, ETFs that track gold fell 2% last month. Global gold assets under management are now at their lowest level since last June.
The sudden spike in silver purchases last month spilled over into ETFs and other derivatives for some time. But after the money crunch failed to support a big price hike, many of the Wall Street Bets’ quick money swing hunters sold their positions.
Online chatter and unusual volumes in silver trading prompted the Commodity Futures Trading Commission to hastily issue a statement announcing that it was closely monitoring the market for “fraud and manipulation”.
Regulators sprang into action after a decentralized campaign by individual investors to buy silver drove prices higher for a few trading days.
For years, however, the CFTC has failed to eliminate fraud and manipulation in the money market by large institutional short sellers. In 2013, he ended a 5-year investigation into allegations that JPMorgan and other banks were manipulating the COMEX money futures market. The CFTC said it had found no evidence of wrongdoing.
The head of the CFTC at the time was Gary Gensler. He is currently President Joe Biden’s choice to head the Securities and Exchange Commission. This means that for the big Wall Street investment banks it will be business as usual.
However, that doesn’t necessarily mean that they’ll keep silver prices depressed. Rising industrial demand, coupled with strong retail bullion purchases, will test the ability of supply to keep pace.
The bullish case of silver does not rest on the conception of a dramatic “short squeeze” event in the futures market. Instead, it’s based on the fact that money is scarce in the face of growing physical demand. It is based on the certainty that inflation will decrease the value of the US dollar and on the history which shows that precious metals work like a sound currency.
