Surges in bond yields, like rising gold prices, have produced headlines for the past few days and have no watertight relationship, but higher yields usually tend to take the luster of the bullion. In the fight for safe haven flow, Gold appears to be winning as investors rethink the traditional safe haven playbook. Analysts point to growing investors’ concerns about fiscal and monetary policy directions in key economies. In the US, Treasury yields in 2010 exceeded 5% on Wednesday for the first time since July, but Japan’s 30-year government bond yields rose 100 basis points this year amidst sustained inflation, negative real rates and political instability. In the UK, 30-year bond yields have risen to a high point since 1998 this week, but in France, the 30-year debt risk premium, which has not been seen since 2008, has not been mentioned as political turmoil threatens to derail deficit reduction plans. Even German outcasters, who benefited from safe demand earlier this year, have been wiped out by sales after 30 years’ yields hit the first hit in 14 years. Meanwhile, gold prices have continued to be a record-breaking run, hitting a fresh high of $3,578.5 on Wednesday. “There are concerns about the possibility of a financial overload and a debt crisis in Japan, France and the UK,” said President Ed Yadeni of Yadeni Research. “Obviously, more investors are choosing to add gold to their portfolios as a safe haven and protect against financial instability.” With rising yields, gold is no longer attractive as gold pays interest, increasing the opportunity costs of bullion harboring. But Gold’s role as a hedge against inflation gives it a unique appeal, Marketwatcher said. This is a situation where inflation is currently at an emergency risk…and gold is the only game in town. One factor at Waikato University Michael Ryan University is that it tilts the scale in favor of gold. It is the politicization of monetary policy. “The big developments really center around Trump and the intervention in the independence of the Federal Reserve,” said Michael Ryan, lecturer in finance and economics, Waikato University. If the Federal Reserve independence is compromised, efforts to curb inflation could be at risk. Recently, US President Donald Trump took unprecedented steps to eliminate Federal Reserve Gov. Lisa Cook, citing allegations of mortgage fraud, but pressured Federal Reserve Chairman Jerome Powell to lower interest rates. “This is a situation where inflation is currently an urgent risk and gold is the only game in town,” Ryan said. Meanwhile, bond vigilantes are “not satisfied with fiscal and monetary policy in many countries,” thus boosting bond yields in developed countries. “Investors tend to go to places where there is momentum, and for now, gold has that. But bonds aren’t.” A safer shelter? Part of the appeal of gold lies in its independence, analysts said. Unlike bonds that promise to repay major investments on future dates, ensuring a higher yield demand to offset inflation concerns is a physical asset that cannot be stifled by mismanagement of the fiscal year or political interference. Both are traditionally considered safe shelter assets, but are fundamentally different, according to Angela Lan, senior strategist at State Street Global Advisors. “Treasury debt is a financial responsibility. It owns the promise to receive future cash flows, and its value is backed by the government. Gold is not a responsibility. It is a physical asset that is not a natural uncommon element of its inherent value, designated by many global central banks and facilities.” According to Vishnu Varathan, head of economics and strategy at Mizho Bank, gold is also sought as the “ultimate store of value” as investors fear unprecedented decline in the US dollar-backed Fiat Currency System. Investors appear to be worried that the US dollar and other banknotes are weakened by too much government debt, growing global tensions and concerns that central banks may not act independently. If financial authorities are pressured to fund government debt by printing more money, they will deeply erode the value of those currencies. The rise in yields raised questions about how high they would be before investors felt that the premium would be enough to start buying long-standing debts again. Varathan said their profits may not be that far, especially if expectations of the Fed will be cut faster than previously expected, and encourage investors to “lock” higher yields. “However, the warning is related to structural risks regarding the risk of unsustainable debt, geoeconomic turmoil and turmoil in the US dollar. This means investors may prefer short-term front-end yields,” he said. Steve Sosnick, chief strategist at Interactive Brokers, said buyers tend to intervene when yields are simply drifting high. “However, if you are concerned about not being able to fund a crisis or deficit, as you see in France or to some extent Japan, that support can be more difficult to find,” he added.
