Precious Metals Soar on Falling Yields, Currency Turmoil / Commodities / Gold & Silver 2019
What a wild week it’s been forinvestors.
The threat of global trade wars andcurrency wars sparked big swings across all major asset classes. Bond yields dove toward historic lows. Stocks plunged earlier in the week beforerebounding sharply by Thursday. Andprecious metals rode a huge safe-haven wave higher.
Gold prices eclipsed the $1,500 levelon Wednesday for the first time in over six years. Meanwhile, silver pushed above $17 an ounce to record a one-year high. Both metals are up over 4%for the week.
The money metals are becoming increasingly attractive as President Donald Trumpramps up his battles against China abroad and the Federal Reserve at home.
On Monday, the Trump administrationformally branded China a “currency manipulator.” China’s central bank had moved to push theyuan lower against the U.S. dollar in apparent retaliation for new U.S.tariffs. The yuan traded at its cheapestexchange rate versus the dollar in more than a decade.
Curiously, the U.S. Dollar Index alsotraded lower this week against the euro and yen.
Perhaps the Trump administration isengaging in some currency manipulation of its own through the TreasuryDepartment’s Exchange Stabilization Fund and the International MonetaryFund. Treasury Secretary Steven Mnuchincalled on the IMF to help put brakes on countries that cheapen their currenciesto gain trade advantages.
A former Treasury Secretary, LarrySummers, said that we may now be at the most dangerous moment since the lastglobal financial crisis ended in 2009. The circumstances are different today, but in some ways the risks aremore extreme.
The entire world monetary order is atrisk. President Trump is now explicitlyditching the “strong dollar” posturing of previous presidents. He wants a weaker dollar and hopes he canpressure the Federal Reserve into cooperating with bigger and more rapidinterest rate cuts.
A shift toward a weak dollar policy could make foreign holders of U.S. assetsnervous. Close to $7 trillion inTreasuries are now held by foreigners. If they begin losing confidence, the government will face a difficultfunding problem.
For now, though, there are few otherplaces for them to turn. Even thoughyields on U.S. bonds have been pushed down close to historic lows, they arestill higher than those attached to the paper issued by other governmentsaround the world.
These days it’s becoming harder to findsovereign debt that even carries a positive yield. The latest estimates are that $14-$15trillion in bonds carry negative yields.
It sounds crazy – bonds that obligateholders to pay interest to the issuing borrowers. But some economists think the negativeinterest rate syndrome could eventually infect the United States.
In the meantime, Treasury holders facethe prospect of earning negative real returns. That is to say, the yields they earn are atgrave risk of falling behind inflation.
The yield on the 10-year Treasury fellto 1.7% this week. That’s below theFed’s target inflation rate of 2%. WithJerome Powell and other Fed policymakers endorsing “symmetric” inflationtargeting, that means they may let inflation run well above 2% for some time inorder to compensate for recent periods of below-2% price level increases.
The entire Treasury yield curve is atrisk of falling into negative territory in real terms. It may have already…depending on which inflation gauge you use.
Fortunatelyfor precious metals investors, gold and silver tend tothrive in an environment of negative real interest rates.
When realinterest rates on paper turn negative, there no longer is an opportunity costassociated with holding gold. Metalsbecome attractive to hold as alternatives to depreciating paper – and tend toperform well.
Gold and silver bugs certainly havereason to be optimistic. Prices have broken out of large consolidation basesahead of near certain additional rate cuts from the Fed and a formal shift bythe White House toward weak dollar policies.
The one missing piece of the bullishpicture is rising inflation pressures. Although price increases are showing up in some areas of the economy,there is no broad inflationary momentum taking hold.
It will likely take a sustained rise inenergy and food commodity prices before inflation fears drive mainstreaminvestors to exit their negative real-yielding bonds and seek protection inprecious metals.
The upshot is that the current bull market phase in gold and silver is still very young. Beforereaching maturity, it will suffer some setbacks. One may be due after this recent run up. Butthe upside potential ahead is far more positive than the yield on anygovernment bond.
By Mike Gleason
Mike Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.
© 2019 Mike Gleason - All Rights Reserved
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