As gold continues its recent ascent, why might this recent move be completely different from the yellow metal’s last few bull markets? Find out here.
In a recent analysis, Forbes contributor Rob Isbitts examined why gold’s recent price gains might be nothing like the other spikes that we’ve witnessed over the past few decades. Instead, Isbitts thinks the global markets are shifting to prop the yellow metal up in spectacular fashion and potentially over a prolonged period of time.
Isbitts recognizes that there is an ongoing flight to safety among investors due to growing uncertainty surrounding global growth, the stock market and geopolitical tensions. This is evidenced by gold and bonds each rising 8% in August, as the two asset classes are generally viewed as the go-to in times of turmoil. Yet while the gold market is flourishing and is held up by numerous sound drivers, the global bond market is in its most dismal state in recent memory.
As Isbitts points out, bonds around the world are sinking into zero or negative-yielding territory. A number of bonds in Europe and Asia have already dropped below zero, forcing their holders to pay interest to the government instead of vice-versa. Of course, Isbitts notes that not everyone buys bonds for their safe-haven appeal: some are forced to purchase them for pension funds, while others buy them for short-term trading. None of these groups of investors, however, are likely to tolerate negative-yielding bonds much longer.
This brings Isbitts to the 10-year Treasury, which has long been treated as a marquee bond by global investors. Recently, the Treasury yield curve fulfilled ominous warnings as it reached the point of inversion, something that is almost universally treated as a sign that a U.S. recession is on the way.
However, there is more to Treasuries’ tepid action than just the threat of a recession. As Isbitts notes, while bonds overall rose 8% in August, the 10-year Treasury’s yield fell to a concerning 1.50%. Over the past 30 years, the gold market has seen two instances of what Isbitts refers to as “monster moves”, and both came during times of unprecedented economic and geopolitical instability. Isbitts believes that we are approaching a third instance of such turmoil, but with one extremely important difference. During each of the two instances where gold prices experienced monumental spikes, 10-year Treasury yields sat between 4% and 5%.
This time, however, they are nearing record lows. Isbitts is among the many believers who think that the 10-year Treasury will eventually follow the path of its European and Asian counterparts and sink into negative territory, something that would have been inconceivable not too long ago. The dip will coincide with a domestic, and possibly global, economic crisis, where investors of all kinds will once again flock to pour their wealth into safety. And as they contrast the landscape of negative-yielding global bonds against the consistently-gaining gold market, there won’t be much of a choice in terms of where to move their holdings.