Gold Leads Interest Rates

There are answers available to the observant about what lies ahead in the future.  To enjoy those answers, one must accept that they are imperfect answers.

Gold is the great leader of many other financial market data series.  It leads grain prices by 15 months.  It leads crude oil prices by just under 20 months.  It leads long term interest rates by just over 20 months.  And that is the point of this week’s chart.

It compares gold futures prices to the Treasury Yield Index, which represents the current yield-to-maturity (YTM) on the most recently issued 30-year Treasury Bond.  It is a well-recognized standard representation of what long term yields are doing.

If this relationship worked perfectly, then we should expect a bottom for yields right about now, to echo the minor bottom in gold prices in late 2019.  But what we are seeing is a 30-year T-Bond yield that seems eager to get started on echoing the up move gold saw more than a year and a half ago.

The chart above does not show all of the recent history of gold prices, which I will remind you included a move up above $2000.  If I were to include all of that data, it would scrunch the chart a lot more, to the point that we could not see the details.  And it is the details which are important in the shorter term.

Here is a zoomed in look at the same relationship:

We can see that the TYX seems to be getting an early start on the big upturn that gold prices are saying should be coming.  It is as if bond yields cannot wait to get started.  There could be a little bit more time yet in this corrective phase, but then the next few months into May 2021 should see much higher yields, if gold’s message is correct.   Then we get to see yields start what should be another corrective wave, from that May 2021 top to an August 2021 bottom.  But that will not be the end of things for the new uptrend in bond yields.

The Fed officials who are calling for sustained inflation rates north of 2% think that will be a good thing.  These boomer economists do not seem to remember the pain of the inflation we endured in the late 1970s and early 1980s, and the additional pain from all of the Fed’s efforts intended to combat inflation.  They now think that inflation is a good thing.  They know not what they do.

This relationship showing how gold’s movements lead to corresponding movements in long term interest rates is something I have been focusing on a lot for the readers of our twice monthly McClellan Market Report and our Daily Edition.  If you are not already a subscriber, perhaps now would be a good time to give us a try.  Sign up at www.mcoscillator.com/market_reports/.