How Bond Yields Are Affecting Gold

“We’ve been living in a world for a quarter of a century where the pressures were disinflationary,” he said... “The economy is a long way from our employment and inflation goals.”

And whether he’s unaware or simply ill-informed, commodity prices are surging. Since the New Year, oil and lumber prices have risen by more than 24%, while corn and copper prices are up by more than 14%.

Please see below:

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Figure 6

In addition, relative to finished goods, the entire basket of inputs is sounding the alarm.

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Figure 7

To explain the chart above, the blue line is an index of the price businesses receive for their finished goods. Similarly, the green line is an index of the price businesses pay for raw materials. As you can see, the cost of doing business is rising at a torrent pace.

More importantly, though, Powell’s assertion that inflation is an urban legend has been met with eye rolls from the bond market. To repeat what I wrote above: Powell’s own policies (and their impact on real and financial assets) actually eliminate his ability to determine when interest rates rise.

Case in point: the U.S. 10-year to 2-year government bond spread is now at its highest level since January 2017.

Please see below:

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Figure 8

To explain the significance, the figure is calculated by subtracting the U.S. 2-Year Treasury yield from the U.S. 10-Year Treasury yield. When the green line is rising, it means that the U.S. 10-Year Treasury yield is increasing at a faster pace than the U.S. 2-Year Treasury yield. Conversely, when the green line is falling, it means that the U.S. 2-Year Treasury yield is increasing at a faster pace than the U.S. 10-Year Treasury yield.

And why does all of this matter?

Because the above visual is evidence that Powell has lost control of the bond market.

At the front-end of the curve, Powell can control the 2-year yield by decreasing the FED’s overnight lending rate (which was cut to zero at the outset of the coronavirus crisis). However, far from being monolithic, the 5-, 10-, and 30-year yields have the ability to chart their own paths.

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Disclaimer: All essays, research, and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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