The price of gold is rising again this year and went up last week as a new inversion in the US bond market with the 3-month and 10-year Treasury bond triggered new money flows into the precious metals market. All of the news in the financial media focused on last week’s stock market dip and the spread of the coronavirus, but new economic data releases show that the US economy began to lose momentum last year before the virus event. We found out last week that GDP for 2019 only grew at 2.3% instead of the promised and predicted 3% rate. The Fed Fund futures market are now projecting an almost certain rate cut before the end of this year.
Here is the 3-month and 10-year Treasury bond yield curve. It measures the difference between the interest rates of these two maturity dates and goes negative when the 3-month yields go higher than 10-year yields. It happened again last week.
As you can see the last big move in these yields happened last August. The Federal Reserve began “REPO” operations soon afterwards. Last year gold prices broke out through the $1350 level right as the Federal Reserve began to lower interest rates so the prospect of more rate cuts is again helping to fuel new money into the gold market. Take a look at the popular SPDR Gold Trust (NYSEARCA: GLD) for instance, which went to a new high last Friday.
There are two things about falling rates that makes people go into gold. First of all when people can’t make as much off of interest the prospect of putting some money into precious metals becomes more attractive from a diversification standpoint, because they provide protection from future inflation. With rates at zero as Ray Dalio recently put it “cash is trash.” This type of thinking is looking far ahead when it comes to taking investment positions and not just focusing on daily gyrations and day trading. That is why the metals market is mainly a big money game with few stock market small fries yet involved. It simply has to go up more before they feel a need to chase price action.
Last week I did an interview with David Skarica of www.addictedtoprofits.net about the current action in the markets. You can find it here.
Remember rising gold prices tend to make big cap mining stocks go up faster than the metal as many of them not only pay dividends, but experience earning growth thanks to the rising price. Silver tends to trade with gold too, so when gold goes up silver goes up at a higher rate than gold. This is why my favorite small cap silver mining stock remains compelling.
-Mike
