Bond yields and gold
Higher bond yields are undermining gold and silver. We examine why, and what are the consequences.
Brien Lundin (@Brien_Lundin) posted this chart on X, which explains much about why gold, and also silver, have weakened recently. In recent months, the negative correlation with US Treasury yields has been very close.
This prompts the question as to why this should be so. Obviously, it reflects changes in the spread between gold’s lease rate and rising bond yields. This is a legacy of the last four decades, when the propaganda struggle to establish the dollar as money replacing gold gradually succeeded.
At least, this was the belief that gradually held sway. If the gold standard was no more than a barbarous relic and gold was little more than a pet rock, of course the dollar was king. Never mind that the dollar was a fiat currency, an imaginary money created by the US government’s central bank.
So long as participants in financial markets believe this tosh, then clearly a rise in dollar interest rates will act to make non-yielding gold less valuable. In other words, we can see why it is that when rates rise, gold weakens. But it is an effect always constrained to a period of perceived currency stability in domestic markets. Not only do US markets default to this error, but markets in thrall to the dollar, such as London and elsewhere fall for it as well.
A large part of it stems from the financialisation of economies stemming from London’s Big-Bang in the mid-eighties, when gold was used as the basis of a carry trade investing in US T-bills. Gold was sold for T-bills, fixing interest rate differentials as drivers of price in collective minds.
The relationship between gold and the dollar of the 1970s and instances of heightened inflation and bond yields were quickly forgotten. At the beginning of that decade, the Fed’s funds rate was 3.7% and gold $35. In 1981, the fund’s rate was 19% and gold hit $850. In other words, there was a positive correlation between the two.
