February 25, 2020
Back
in 2019, we often wrote of how Fed Chairman Powell was being painted into a
policy corner by the bond market. We knew this would force fed fund rate cuts,
and it did. And now here we are again in 2020.
If
anything, this isn't complicated. As last year began, the vast majority of
analysts and seven-figure Wall Street economists were projecting rate hikes and
a 4+% U.S. ten-year treasury yield. We knew this was nonsense, as neither the
public nor private sector could handle or manage this level of interest rate
debt service cost. Soon the bond market began to understand this, too, and as
2019 unfolded, we began to document Powell's conundrum and make some pretty
easy predictions:
•
This from early April:
https://www.sprottmoney.com/Blog/painted-into-a-co...
•
This from the very day gold began its
ongoing rally:
https://www.sprottmoney.com/Blog/what-is-the-bond-market-telling-you-craig-hemke-28-052019.html
So
with this theme in mind, what is the bond market telling you in 2020? Clearly
Powell has been painted into a corner once again.
As
I type this on Tuesday, February 25, check the U.S. yield "curve":
•
Fed funds (overnight): pegged at
1.50-1.75% for an "effective rate" of
1.65%
•
the U.S. two-year note:
1.21%
•
the U.S. ten-year note:
1.34%
•
the U.S. thirty-year bond:
1.81%
And
now check these charts. Does it appear that a sudden reversal is in the cards?
Thus
the bond market is telling you, the gold investor, two very important things:
And
it is point #2 above that you MUST understand. In the global investment world,
U.S. treasuries are the safe haven benchmark, and as such, the primary
competition to physical gold. If going forward, every single newly-issued U.S.
treasury comes with a negative real return, the incentive to hold it falls.
Why? It's simple. Why would you want to hold as a core position a guaranteed
loser? And that's what U.S. treasuries have become.
Now
this doesn't mean that suddenly all safe haven flows will rush into gold. The
dollar amount of negative nominal rates globally have grown to nearly $15T at
last check, so it's clear that global investors still feel that
any
return of principal beats a lack of current income. However, as rates trend
ever lower, some of that safe haven U.S. treasury and sovereign debt demand
invariably shifts to gold—in all its forms—from physical to unallocated
accounts, to ETFs, to futures contracts, and even to mining shares. This was
our forecast for 2020, and we posted it back in early January. If you missed it
then, you should read it now:
https://www.tfmetalsreport.com/blog/9858/2020-fore...
So
what's the point of this post? Understand this:
Yes,
gold prices have surged higher in 2020 and some of this is due to a fear-based
trade over the growing concerns of a coronavirus global pandemic. But prices
were already headed higher
before the emergence of the virus, and the
interest rate driver of this move has only accelerated over the past few weeks.
Just
as in 2019, Powell's Fed has been painted into a corner. They will soon act to
cut rates and add liquidity, and this will help to provide for a consistent bid
for gold in all its forms...which will lead to consistently higher prices as
2020 unfolds.
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