Make Kitco Your Homepage

Investors aren't 'stampeding' out of gold because inflation is still a threat - Axel Merk

Kitco News

Editor's Note: With so much market volatility, stay on top of daily news! Get caught up in minutes with our speedy summary of today's must-read news and expert opinions. Sign up here!

(Kitco News) - Sharply rising bond yields have taken some bullish momentum away from gold; however, one fund manager said that the precious metal is holding up relatively well considering how quickly yields have risen.

Given the headwinds in the gold market, as the yield on U.S. 10-year notes has risen from 0.5% to 1.6% in the last six months, Axel Merk, president of Merk Investments, said in a telephone interview with Kitco News that it is surprising that prices aren't significantly lower.

While bond yields are currently trading near a one-year high, gold prices are finding support around their June lows. April gold futures last traded at $1,761.70, down 0.77% on the day.

"The reason why we don't see a stampede out of gold is because some people think maybe the bond selloff is overdone, or maybe inflation is going to be more than anticipated," he said.

While gold could continue to struggle in the short-term as bond yields have further room to move higher, Merk said that investors have to look at why the bond market is selling off. He sees the two scenarios: bonds are moving higher because growth expectations are picking up, or markets are pricing in an interest rate hike from the Federal Reserve.

With so much uncertainty surrounding global growth, Merk said it is unlikely the Federal Reserve is planning a rate hike anytime soon. This week Federal Reserve Chair Jerome Powell said in testimony on Capitol Hill that the central bank is committed to maintaining its accommodative monetary policy for some time.

Growing optimism for a stronger-than-expected recovery appears to be the most like factor driving bond yields higher, Merk said. He added that the next question now becomes whether the economic activity will pick up faster than inflation.

Merk said that although economic growth can pick up momentum in the short-term, it will be challenging to maintain current expectations.

"There are a lot of issues that will impact long-term growth," he said. "Obviously, we will get out of the hole that we have right now. But there was a lot of damage that was done to the economy. It's going to take time to heal."

Merk said that he still sees gold as an important portfolio diversifier and long-term hedge against inflation in the current environment. He added that gold remains an attractive non-correlated asset in a world where all markets and investments are connected because of massive stimulus that has been pumped global financial markets.

As to how far bond yields can run? Merk said that in the current environment, where the U.S. government is on the cusp of passing another $1.9 trillion stimulus package, the bond market selloff is a little overdone. However, because of the market's strong momentum, he said that he wouldn't be surprised to see yields pushing to 2%.

"We do see growing potential for the economy, and yields at 2% is not a dramatic outlook. An improving economy should be reflected in higher yields," he said. "The pace of how quickly we get to 2% could be a little concerning."

Although bond yields still have a little room to go higher, Merk said he doesn't expect the Federal Reserve to initiate a yield curve control program anytime soon.

"The problem is that when you draw a line, the markets will want to test your conviction," he said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.