Bond yields roil markets, gold/silver drop

As financial markets sold off this week, precious metals got dragged down in the selling. The culprit, once again, was rising bond yields.

On Thursday, the 10-year Treasury climbed above 1.5%. While still low on a historical range, the upside momentum has investors concerned. Over the past seven months, the 10-year yield has tripled from a low of just 52 basis points. 

The 10-year note serves as a benchmark for mortgage rates as well as risk premiums in the equity markets. Elevated price-to-earnings ratios in the S&P 500 are more difficult to justify in a higher interest rate environment. 

As we’ve noted, real interest rates are also a headwind to precious metals markets. The key word there is “real” – as in, after adjusting for inflation. And if inflationary pressures continue to grow, that could be all that is needed to drive real interest rates down deeply into negative territory. 

The Federal Reserve may also be on the verge of restarting Operation Twist. Under that program, the central bank sells some of its short-dated Treasuries and buys longer-term bonds. The aim is to drive down long-term yields. 

But when Fed chairman Jerome Powell spoke on Thursday, he gave no definitive commitment to launching Operation Twist or any other intervention to tame the bond market.

At some point, Wall Street may force Powell’s hand. Despite trillions of dollars in COVID stimulus and more to come, the economic recovery is shaky with inflation risk rising. 

Trends forecaster and a many time guest here on our podcast Gerald Celente released a video yesterday warning of what he calls “dragflation”:

Gerald Celente: And Powell failed to reassure investors that central banksters would keep surging bond yields and inflation expectations in check. What did we say about inflation? Only about six months ago in the Trends Journal, coined the term dragflation. Economy dragging down and inflation going up.

Despite inflation showing up in oil prices and elsewhere in the economy, gold and silver trading markets aren’t really reflecting that reality at this time and have had a really tough week.

On the plus side for gold and silver bulls, the selloff in precious metals mining stocks didn’t gain any new downside momentum this week. In fact, the GDX gold miners index showed a slight gain through Thursday’s close.  

If gold and silver equities continue to display relative strength versus the broad market averages, that would bode well for precious metals themselves. 

It’s been several months since a fear trade gripped Wall Street. But with stocks showing vulnerability and bonds failing to serve as a good counterweight, precious metals may begin to look more attractive to more investors as an alternative asset class for portfolio diversification.

Bullion dealers including Money Metals Exchange have seen buying activity surge in recent weeks, especially for silver products. However, sentiment among those who trade futures and exchange-traded products is an entirely different story.

The paper gold markets have yet to pick up. According to the World Gold Council, holdings ETFs that track gold declined last month by 2%. Global gold assets under management now sit at their lowest level since last June.

Last month’s sudden spike in silver buying did carry over into ETFs and other derivatives for a while. But after the silver squeeze failed to sustain any big upside in price, many of the fast-money momentum chasers from “Wall Street Bets” sold out of their positions.

The online chatter and unusual volumes in silver trading caused the Commodity Futures Trading Commission to hurriedly issue a statement announcing it was closely monitoring the market for “fraud and manipulation.”

Regulators jumped into action after a decentralized campaign by individual investors to buy silver pushed prices up for a couple trading days.

For years, though, the CFTC has failed to root out the fraud and manipulation being perpetrated in the silver market by large institutional short sellers. In 2013, it ended a 5-year investigation into allegations that JPMorgan and other banks manipulate the COMEX silver futures market. The CFTC claimed it found no evidence of wrongdoing.

The head of the CFTC at that time was Gary Gensler. He is currently President Joe Biden’s pick to run the Securities and Exchange Commission. That means for the big investment banks on Wall Street, it will be business as usual.

It doesn’t necessarily mean they will keep silver prices depressed, however. Rising industrial demand coupled with powerfully strong retail bullion buying will test the ability of supply to keep pace.  

The bullish case for silver doesn’t rest on engineering a dramatic “short squeeze” event on the futures market. Instead, it is based on the fact that silver is scarce in the face of rising physical demand. It is based on the certainty that inflation will diminish the value of the U.S. dollar and the history that shows precious metals function as sound money.