Banyan Gold Corp. (TSXV: BYN, OTCQB: BYAGF)
The New Yukon Gold Rush
Recently, the news of gold prices reaching new highs has frequently captured people’s attention. If the surge in gold prices seems inexplicable, the trends of U.S. Treasury bonds and the U.S. dollar can only be described as “unusual.” However, investors must always approach the market with awe and humility, holding the attitude that existence is reasonable, and meticulously studying the underlying logic.
Let’s delve into this “unusual” phenomenon.
This week, while gold prices hit intraday records, U.S. Treasury bond yields, especially the long end of the yield curve, also saw a significant surge—a rather unusual occurrence. Specifically, the 10-year treasury yield rose by 1.23 basis points, resulting in an increase of nearly 3 percent, while the 30-year treasury yield also skyrocketed. According to conventional logic, rising bond yields are detrimental to gold prices because gold is an interest-free asset, unlike financial assets such as deposits, bonds, and stocks, which offer interest and dividends. Therefore, when interest rates rise, investors tend to sell gold and buy bonds.
Moreover, Karen Karniol-Tambour, Co-Chief Investment Officer of Bridgewater Associates, stated on Wednesday that the simultaneous appreciation of the U.S. dollar and gold in recent times are “anomalies.” The U.S. dollar and gold are traditionally viewed in a competitive relationship, however, with the U.S. dollar index rising by approximately 3% this year while gold prices have also climbed by 11.5% to $2,299.17 per ounce.
So, what is the underlying logic behind this unusual phenomenon?
If we must find reasons, a major factor driving the increase in gold prices is the market’s expectation of a Federal Reserve rate cut. Joseph Cavatoni, a market analyst at the World Gold Council (WGC), stated on Monday that it’s an “exciting moment” for gold, as many market speculators are confident in the Fed’s rate cut. Federal Reserve Chairman Jerome Powell also recently reiterated that despite strong recent job data and higher-than-expected inflation rates, this would not significantly alter the overall economic policy guidelines for the year.
If this explanation holds true, it leads to yet another abnormality. Since everyone expects the Federal Reserve to cut rates, the implication is that the inflation monster has been subdued, yet why did the long end of the yield curve still rise?
Two factors following may explain this phenomenon.
Firstly, the market may be realizing that inflation has not yet left us, and rate cuts and loose monetary policies will further raise inflation. Once this becomes the consensus in the market, a rise in long-term interest rates is a natural consequence. The second possible reason is that the upward movement of bond yields reflects an imbalance in supply and demand in the bond market, in other words, the U.S. Treasury continues to issue debt on a large scale, but there are fewer takers. When supply outstrips demand, prices naturally decrease.
