Last week’s stunning move in yields derailed gold. Where does the metal go now?

March 8, 2021

Dear Fellow Investor,

Over the last couple of months, I’ve been discussing the rise in Treasury yields, including real, inflation-adjusted yields, and their effect on gold.

Last week we saw those deleterious effects spread to the U.S. stock market, particularly the tech-heavy Nasdaq, sending investor worries to near-panic levels.

Fear was in the air. And it is there to some extent again today, as the Nasdaq is dropping (even while the Dow is rallying), the 10-year Treasury yield has surpassed 1.6%...and gold is down another $20 at the time of writing.

As you can see from the chart below, both nominal and real yields remain elevated.

While we haven’t seen a very close, day-to-day correlation, it’s hard to escape the fact that gold has been driven down by the surge in yields.

And most of that increase in yields is due to the bond market’s recognition of the rising inflationary pressures that we’ve been talking about.

Our friend Peter Boockvar recently published a great commentary on this in his daily service:

“In looking at the rise in the 10-year yield from the closing low of 0.51% on August 4th, 2020 we can break down how much of the rise since is due to an increase in inflation expectations and how much is the estimate for growth. So, we’ve seen a rise of 95 bps in the nominal 10-year yield to this morning’s 1.46% level since that low. Since August 4th, the 10-year inflation breakeven in the TIPS market is higher by 65 bps to 2.22% today. Thus, about 2/3 of this move higher in nominal rates is on higher expectations for inflation relative to growth.”

Considering the growing signs of inflation just ahead, it’s not surprising that the markets are reacting.

And boy are they, with the rise in rates creating cracks in the foundation of the equity markets. Whenever the 10-year Treasury yield has touched 1.5%, for example, we’ve seen tremors spread through the U.S. stock market.

Again, the selling has been particularly heavy in the high-flying, tech-heavy Nasdaq.

While the talking heads on CNBC are earnestly assuring viewers that the sell-off so far is “mostly sector rotation,” they haven’t been able to resist the temptation to trot out the old “Tech Wreck” headlines.

Frankly, I think the recent turmoil has represented a pre-fight face-off between the stock market and the Fed…with a battle royale about to begin.

When that battle happens, whether it’s days or weeks ahead, we will find out to what extent the stock market is dependent not upon low interest rates, but ever-lower rates.

The Fed, of course, will “yield” and do whatever is necessary to keep its financial-asset house of cards erect. A key question will be how soon they act. Will they wait until a market crash, or will they move more quickly, to forestall a potential crisis.

You can bet that the markets will progressively test the Fed’s resolve, searching for the level that triggers the central bank to act.

And there’s another scenario that, while we have talked about it before, we haven’t spent enough time discussing in these pages: The Fed losing control.

This is what Wall Street genuinely fears most. As long as the Fed is there to catch the stock and bond markets when they fall, speculators can put up with the occasional sell-off and just plow back in.

But what if investors begin to sniff weakness from the Fed? What if the “bond vigilantes” return and demand significantly higher yields?

The Fed would have to respond with ever-greater purchases of Treasurys, to levels that would make the Bank of Japan blush.

The question is whether it would be enough. And if it isn’t, if the Fed genuinely does lose control and Treasury yields rise, even to just 2%-3%, the implications for debt-service costs would send the federal budget into a deficit-ballooning spiral. And this would force a greater, and much quicker, depreciation of the dollar.

Gold, in this scenario, would likely perform as we have been expecting it would over the next five years or so…but those years would compress into months or even weeks. Everything’s happening much more quickly these days, so this would simply reinforce that pattern.

As Mencken said, “be careful what you wish for.” I’d much rather have a longer, steadier gold bull market, like that of the 2000s, wherein we can reap tremendous profits from our junior mining plays.

But in either scenario, you’ll want to be positioned in gold.

A Big Opportunity

In our March issue of Gold Newsletter, released late last week, I devoted much of the issue to discussing these developments and potential future scenarios.

If you’re looking for someone to tell you precisely when and where the bottom will be in this gold correction, you won’t find it in this issue. As I’ve stated before, no one can tell you where the absolute bottom will be, and you shouldn’t trust anyone who tells you they can.

But I will tell you this: When the rebound does begin, it will come so quickly that you’ll risk getting whiplash.

With that in mind, you need to begin accumulating the best mining stocks at these major lows. And our March issue of Gold Newsletter — with coverage on 39 top junior mining stocks — is packed with specific ideas, including:

• A company that just signed a deal on a massive, 15,000-hectare silver exploration property. And it comes with more than promise…it also comes with profits.

That’s because the property is already in production, selling 1.7 million ounces of silver a year!

• A junior gold company with 645,000 ounces of indicated resources at 3.67 g/t gold-equivalent…plus 217,000 ounces of inferred resources at 2.68 g/t gold- equivalent…

…Plus recent drill holes including 21 meters of 9.82 g/t gold-equivalent and 52 meters of 3.17 g/t gold-equivalent…and a market cap still under C$15 million!

• A gold mine developer that — by merely changing its mine plan on paper — was able to double its mineable ounces and multiply its projected value to $1.3 billion.

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All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference

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