In recent weeks, analysts and investors in precious metals have been paying close attention and mentioning the evolution of treasury yields, to determine what may happen to the price of gold. Indeed, these yields have become one of the factors that have most influenced the level reached by the precious metal. Why are they so related? What should we look at?
In previous posts we have explained that there are a number of investment assets that tend to compete with gold for the favor of investors. These include stocks (with higher risk than gold) and treasury bonds, the latter with a more similar profile to precious metals.
Both gold and treasury bonds are assets that are usually present in the portfolioos of prudent investors.
What Are The Bonuses?
Bonds are debt instruments issued by a company or public administration to finance itself. The issuer undertakes to return the money to the buyer of that bond, plus previously fixed interest, known as a coupon. That is why it is known as a fixed income instrument.
The returns, therefore, are the profits that the investor will obtain for having acquired that bond, which will be a benefit when the time of maturity arrives, for example, at 10 years.
These yields fluctuate during their term, depending on various variables, such as official interest rates or the level of inflation.
Typically, when we talk about bond yields relative to the price of gold, we are referring to the 10-year US Treasury bond, which is the most widely spread.
In fact, the yields on these bonds have been the main obstacle gold has encountered since the beginning of this year, preventing it from holding on to the record price level it reached in 2020.
Thus, yields on 10-year US bonds rose from 0.90% at the beginning of last January to 1.77% (their highest in 15 months) on March 30.
Another issue is real bond yields, which are obtained by discounting inflation from nominal yields. In this case, although real yields have also increased during this period, more importantly, they have remained in negative territory (because interest rates in the United States have been near zero for some time).
Returns And Opportunity Cost
When treasury yields rise, investor interest in treasury increases as well, while gold looks less attractive.
It is often said, therefore, that the increase in bond yields increases the opportunity cost of owning gold. By opportunity cost we understand the value that we give up when we choose one option and not another. That is, in the case of gold, its opportunity cost is the money that we would have been earning if we had invested in bonds instead of the metal.
That is why gold and bonds have a negative correlation: when one goes up, the other goes down and vice versa.
In the attached graph, this inverse relationship between the yields of the 10-year US Treasury bonds and the price of gold can be perfectly appreciated, between January 2019 and April 2021.
According to the latest Precious Metals Weekly report from the consultancy Metals Focus , the rise in bond yields is the consequence of a combination of factors, among which are optimism regarding the economic recovery, the deployment of vaccines and the announcement of new fiscal stimuli in the United States.
The increase in inflation expectations, which rose in the United States in March to its highest level since 2006, will also contribute to this.
However, since the beginning of April the rebound in bond yields has stopped, which at the end of the month had fallen 0.20% from the maximum registered in March.
This has caused the rebound effect in the price of gold, which has recovered ground and registered its maximum of the last seven weeks, with 1,790 dollars an ounce.
The uneven economic recovery between countries will dampen optimism among investors, not to mention the possibility that new waves of infections will force further lockdowns.
Furthermore, Metals Focus believes that even if bond yields continue to rise, inflation growth will absorb them, and real yields will remain negative, which is good news for gold.