Don't Fear Rising Treasury Yields, Gold Market Still Has Value - ETF Securities
Maxwell Gold, director of investment strategy at ETF Securities by Aberdeen Standard Investments
In a telephone interview with Kitco News, Maxwell Gold, director of investment strategy at ETF Securities by Aberdeen Standard Investments said that although 10-year bond yields are holding near seven-year highs, real yields are slightly just above 1% which still makes gold an attractive value asset for investors. He noted that historically, real rates have to push above 2% before they start to have a significant adverse effect on gold.
Gold’s comments come as the yellow metal struggles to gain enough momentum to push back above $1,200 an ounce, which many analysts see as a new critical “line in the sand for” the market has to regain. December gold futures last traded at $1,192.90 an ounce, up 0.11% on the day.
According to Gold, it’s not precious metals investors who should be worried about higher interest rates, but equity investors. Since the start of the month and the fourth quarter, the S&P 500 has lost 3%. The index last traded at 2841, down 1.37% on the day.
“If rates continue to rise that cause a revaluation in equity markets, leading to higher volatility,” he said. “That could be a strong catalyst for gold given the large bearish speculative positioning in the marketplace.”
Gold added that he would expect to see investors move into defensive assets like gold as equities continue to fall and volatility picks up. In this scenario bond yields, the U.S. dollar and gold can all jump in tandem together, he said.
Not only will higher interest rates and bond yields impact equity valuations, but Gold also noted that they could affect economic growth as U.S. government deficits continue to grow.
Some analysts have noted that government debt has risen at the fast pace in history, outside of a recession.
“We have hit the fiscal stimulus at the time in the market cycle where it is not truly needed and that is the big issue,” he said. “Fiscal policy and monetary tightening will soon be coming to a head and is a concern for markets.”
Not only do higher interest rates weigh on growth, but Gold said he expects the increase in government spending will push inflation higher than economists and the U.S. central bank is assuming, which would keep real rates low and benefit gold.
Although Gold still sees a strong bullish case to own gold, he does admit that there are unknown short-term factors -- particularly the impact of ongoing trade issues between China and the U.S. -- that could push prices lower.
The recent trade war has significantly weakened the Chinese yuan against the U.S. dollar, which has been a drag on gold prices.
“If we see further weakness in the yuan, we would expect to see lower gold prices,” said gold. “However, if the Chinese economy weakens significantly that will impact global growth and long-term I think that will drive investors to gold.”