Gold has rallied big this week, but it’s no reason for gold bugs to rejoice.
As President Biden was winging his way toward Israel, the remains of a rocket, likely from Hamas, fell on a hospital parking lot in Gaza, resulting in significant if still undetermined civilian casualties.
The event turbocharged an already tense situation and sent safe-haven investments flying higher.
But even before these latest developments, there had been a rush to safety, with not only gold and silver rising, but also Treasury yields and the dollar.
Any port in a storm, as they say.
“The Inevitable Seems to Have Become Imminent”
The stampede to safe havens continued yesterday, with gold adding to its gains, soaring as much as $40 higher. Gold ended up over $25. Silver ended in the green as well.
Again, gold bugs shouldn’t be too happy about these moves, not only because of the death and destruction that’s sparked the price rallies, but also because the very likely de-escalation ahead will send metals prices right back down.
In the end, this geopolitical spike will have obscured underlying fundamentals that are now pointing, more than ever, toward a reckoning in the markets and the financial system.
I confused some followers on Twitter/X yesterday when I cryptically posted that “The inevitable seems to have become imminent.”
That comment wasn’t directed toward the events in Gaza or the market mayhem that’s resulting, but rather toward the macroeconomic issues that seem to be coming to a climax now.
I’ve written extensively for years now on these issues, primarily how debt levels this high make positive real rates impossible to bear... and all the repercussions that follow from that hard fact.
But there’s another issue that I’ve barely touched on: what happens when/if the Fed loses control of interest rates?
This issue revolves around the apparent re-emergence of the “bond vigilantes,” those nameless investors who, upon looking at the U.S. fiscal situation in the 1980s, essentially shouted “No!” as they sold bonds relentlessly.
In short, they demanded a much higher yield to take on the risk that was apparent to them.
Fast forward to today, and we see the U.S. Treasury force-feeding a mountainous supply of new paper – thanks to an exploding deficit, a tsunami of existing Treasurys rolling over and a backlog of issuance from the latest debt-ceiling brinkmanship – into a market devoid of its usual buyers.
Not only the Fed, but other central banks have withdrawn from buying Treasuries... and those buyers who might be so inclined to purchase are now doing so only if much-higher returns are guaranteed.
No less than the last three Treasury auctions have been abysmal failures.
If the bond vigilantes wrest control over rates, they will tighten monetary policy far in excess of what the Fed intends...and truly send the economy reeling.
In reaction, the Fed will, as usual, overreact, and unleash a flood of new liquidity that will make their previous efforts pale in comparison.
James Lavish has a fantastic thread on Twitter/X explaining the trend in process right now.
Say what you will about central banks running the global economy, but at least there’s been some order to that regime. What lies ahead will be disorderly, dangerous... and very bullish for gold, silver, and other safe havens.
About the Author:
Brien Lundin is the publisher and editor of Gold Newsletter, the publication that has been the cornerstone of precious metals advisories since 1971. Mr. Lundin covers not only resource stocks but also the entire world of investing. He also hosts the annual New Orleans Investment Conference. To get Brien Lundin’s ongoing commentary on the markets at no charge, click here to subscribe to his free Golden Opportunities newsletter.
