Contact us
CALL US NOW 1-888-GOLD-160

The Mainstream Is Wrong About Rising Bond Yields and Gold

  by    0   2

Prices are going up. The Federal Reserve is printing money at an unprecedented rate. The US government continues to borrow and spend at a torrid pace. As Peter Schiff put it in a recent podcast, we’re adrift in a sea of inflation. Gold is supposed to be an inflation hedge. So, why isn’t the price of gold climbing right now?

In a nutshell, rising bond yields have created significant headwinds for gold. And the mainstream is reading rising yields and their relationship to gold all wrong.

It really comes down to expectations. Most people in the mainstream view rising yields as an inflation signal, and they expect the Federal Reserve to respond to this inflationary pressure in a conventional way. They expect the Fed to tighten monetary policy, raise interest rates and shrink its balance sheet.

As Peter Schiff has explained on numerous occasions, this won’t happen. The Fed won’t fight inflation because it can’t. It will ultimately surrender to inflation.

Right now, the markets sense that inflation is going to be moving higher. And maybe even higher than what the Fed is acknowledging. But I think the markets still believe the Fed — that the Fed will be able to contain the inflation problem before it really runs out of control. So, it’s the expectation that the Fed’s going to fight inflation by raising rates — that’s what’s pressuring gold. But the markets are wrong. The Fed is not even going to attempt to fight inflation. It’s going to surrender. Inflation is going to win without a fight. And when the markets realize that the Fed is all bark and no bite, and that inflation is going to be an even bigger problem that is going to be uncontrollable, then the bottom’s going to fall out of the dollar and gold’s going through the roof.”

Given the level of government borrowing and spending, the Fed can’t let rates rise. It would topple this economic house of cards sitting on top of a mountain of debt. You can’t sustain a debt-based economy in a high interest rate environment. And the Fed certainly can’t shrink its balance sheet when the US Treasury is trying to sell trillions of dollars in US Treasuries into a market that is already oversaturated. One of the reasons we’re seeing rising bond yields is because the US government continues to flood the market with Treasuries. It’s a simple supply and demand dynamic. If anything the Fed will have to buy even more Treasuries to keep the bond market propped up. I expect to see additional quantitative easing before we see any kind of tapering or balance sheet reduction.

That means more inflation — not less.

Peter said he doesn’t know if gold has hit its lows yet, but he knows we haven’t seen the highs.

Peter isn’t the only analyst that believes gold’s best days are ahead. Guardian Vaults business development manager John Feeney told Kitco News that he thinks the price of gold could double in the next five years.

One of the main drivers for gold demand is a hedge against inflation,” he said. “Inflation usually comes about after a rapid increase in the money supply. That’s exactly what we saw in 2020 — an unprecedented expansion of the money supply globally last year.”

Most significantly, Feeny noted that rising bond yields aren’t necessarily a bad sign for gold. In fact, we’ve seen bond yields and the price of gold rise simultaneously before – during the stagflation period in the 1970s.

Between 1972 and 1982, the yield on the 10-year Treasury rose from 6% to 15%.  During that same period, the federal funds rate rose from 5% to 20%. Meanwhile, the price of gold climbed from $50 an ounce to $650 per ounce. Gold saw a better than 1,000% return despite the dramatic rise in bond yields.

Feeny noted, “During the 1970’s President Nixon wanted strong economic growth and low unemployment at any cost and was not concerned about rising inflation. The sharp jump in the money supply is what preceded a runaway inflationary period.”

Sound familiar?

Jerome Powell insists that price inflation isn’t a problem. He tells us any rise in prices will be “transitory.” Much like the policymakers in the 70s, government officials and central bankers are fixated on unemployment and fixing the economy. They don’t care about inflation. Once they realize inflation isn’t “transitory,” it will be too late.

Feeny picked up on the similarities between Nixon and the current regime.

The language that’s been coming out of the Fed lately has been similar to Nixon in the fact that they say that they’re happy to let inflation run above target for a period as well. They’re more concerned about low unemployment and economic growth and less concerned about inflation. The current environment is similar to the 1970s. I feel like it could rise a lot further than what they anticipate and a lot further than what they would like to see.”

Currently, investors seem fixated on rising yields. Feeny said that attitude won’t last once the markets figure out inflation is for real and the Fed had no ability to fight it in a meaningful way.

If we did see inflation running out of control in years to come, there is almost zero risk in owning gold, as it would have an incredibly high percentage chance of performing well under that environment.”


Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!

Related Posts

CPI vs Rate Cuts: The Fed’s Mission Impossible

With a hot CPI report casting a shadow of doubt on the likelihood of a June interest rate cut, all eyes are on the Fed. But they’ve caught themselves in a “damned if they do, damned if they don’t” moment for the economy — and the news for gold is good regardless. 


The Educational Gap in Economics

It’s no secret that the American public is wildly ignorant of many issues that are central to the success of our nation. Just a generation ago it would have been unthinkable that less than half of the American population could recognize all three branches of government. America is in most cases far less educated about its government […]


Central Banks Are Buying the Gold Top

In investing, “Buy low, sell high” is among the most well-known sayings, and generally, it’s good advice. But with gold still holding near its historic all-time highs, central banks led by China are bucking the classic adage and smash-buying more, buying the top to fortify themselves against a global monetary and financial blow-up.


The Passive Investor Problem

When John Bogle died in 2019, people around the world mourned. Bogle created the Vanguard Group and made the index fund mainstream. Index funds are investment vehicles that invest in a class of investments as a whole, rather than trying to predict what specific stocks or securities will do best. So an investor could invest in an […]


Student Loan Inflation, Here it Goes Again

As the Democratic Party has shifted away from its traditional base of working-class and middle-class Americans, to an increased reliance on college professors, students, and highly educated but low-paid professions, such as social workers, a new policy has risen to prominence: student loan forgiveness. 


About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
View all posts by

Comments are closed.

Call Now