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Rise in Treasury Yields May Portend Volatility in the Months Ahead

U.S. yields surged to begin 2022 as financial markets gird for central banks to begin tightening monetary policy.



This article was originally published by Pimco Blog

U.S. Treasury yields started the year with a sharp move higher as investors confront the possibility that the U.S. Federal Reserve may not only embark on an accelerated rate-hiking cycle, but also bring forward the timetable to begin reducing the size of its balance sheet.

With the Fed and other central banks gearing up to tighten monetary policy to combat persistent signs of inflation, just as the spread of the omicron variant of COVID-19 produces fresh economic disruptions, we expect financial markets to experience further volatility during the first quarter of 2022.

Given the advancing stage in this economic cycle, and the market’s heightened sensitivity to incoming data as the Fed prepares to withdraw stimulus, PIMCO advocates a nimble approach and prefers investments at the higher end of the liquidity spectrum. We also favor being underweight duration, or market exposure to U.S. interest rates.

Central banks take center stage

U.S. 10-year yields rose to the highest level in two years to start 2022, climbing as high as about 1.79% from 1.51% at the end of 2021. The yield curve, which represents the difference between shorter- and longer-dated bond yields, flattened as investors pulled forward expectations for the Fed and other central banks to increase short-end policy rates.

The moves came as the Fed last week released minutes from its December policy meeting that further highlighted the central bank’s recent hawkish turn in the face of economic data showing continued strength in inflation and wage growth.

At that meeting, officials brought forward their forecasts for rate hikes, with the median projection showing three increases in 2022, three more in 2023, and two in 2024. The Fed also doubled the pace of tapering its asset-purchase program, which is on track to end by mid-March.

Other major central banks have recently changed course as well. The Bank of England in December unexpectedly raised its policy rate, to 0.25% from 0.10%, to combat persistent inflationary risks, while the European Central Bank said it would scale back its own asset-purchase program.

The minutes showed the Fed also discussed a timetable to potentially start its balance-sheet runoff. That’s when the Fed will no longer reinvest proceeds from maturing Treasury and mortgage-backed securities it has bought as part of its quantitative easing (QE) program. The minutes indicated officials are focused on inflationary risks and view the labor market as closing in on levels the Fed considers maximum employment.

Outlook calls for volatility

The latest monthly U.S. employment data, released last week, offered further evidence of the forces that may accelerate policy tightening. The report showed strong hourly earnings and an unemployment rate that fell to just 3.9%, figures that seem to support the likelihood of an initial Fed rate hike in March. In that event, a balance-sheet-reduction announcement could come as early as midyear, in our view.

Data this week showed the consumer price index rose 7% year-over-year in December, the fastest annual pace in almost 40 years. This came broadly in-line with economists’ forecasts and market expectations. U.S. 10-year Treasury yields retreated modestly after the report.

The prospect of rising rates and central bank bond-buying programs moving into reverse – known as quantitative tightening, or QT – is being felt across financial markets. The breakeven rate for Treasury Inflation-Protected Securities (TIPS), which measures the difference between nominal and inflation-adjusted yields, fell late last week amid concerns about potential QT and increased TIPS issuance set for 2022.

Despite the possibility of heightened volatility, we believe 2022 can provide an attractive opportunity set for investors positioned to take advantage of both macro and relative value opportunities when they arise. We also expect active duration management to become a more important factor in investment returns than in the past.

For more on interest rates, visit PIMCO’s rates page.

Rick Chan is a portfolio manager focusing on global macro strategies and relative value trading in interest rates. Abhishek Nadamani is a portfolio manager on the U.S. rates desk. Christopher Youssef is a portfolio manager focusing on interest rate relative value trading strategies.

All investments contain risk and may lose value. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government.

US Federal Reserve (The Fed)

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the author and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2022, PIMCO.


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Oil Is “Out Of OPEC’s Hands” And “Going Higher”

Oil Is "Out Of OPEC’s Hands" And "Going Higher"

Submitted by QTR’s Fringe Finance

This is Part 1 of an interview with Harris Kupperman,…

Oil Is “Out Of OPEC’s Hands” And “Going Higher”

Submitted by QTR’s Fringe Finance

This is Part 1 of an interview with Harris Kupperman, founder of Praetorian Capital, a hedge fund focused on using macro trends to guide stock selection. Mr. Kupperman is also the chief adventurer at Adventures in Capitalism, a website that details his investments and travels. 

Part 2 of this interview is here.

Harris is one of my favorite Twitter follows and I find his opinions – especially on macro and commodities – to be extremely resourceful. I’m certain my readers will find the same. I was excited to get the chance to ask him about anything I wanted, which I did last week.

Q: Hi Harris, thanks for agreeing to chat. Let’s jump right into commodities: OPEC said this week they don’t want oil to hit $100 / barrel. Is there a situation where you think OPEC is no longer in the drivers’ seat in helping determine oil prices?

Honestly, it’s out of their hands.

Governments around the world are stimulating demand. They’re going crazy. They’re printing money and subsidizing users. At the same time, they’re making it amazingly painful for producers to produce oil. They’re withholding permits and blocking pipelines.

They’re already talking about excess profits taxes and carbon taxes are next. Why would anyone increase production under these circumstances? Hence, non-OPEC production isn’t going up much.

So, OPEC is left to make up the balance. They can talk about raising production by 400k/d, but they’re already almost out of spare capacity. They aren’t even hitting their own internal targets. It’s increasingly out of their hands at this point. Oil is going higher.

I recently spoke with Andy Schectman about his thoughts on silver and gold. I was wondering what your outlook on precious metals, including thoughts on less discussed metals like palladium and platinum, was?

If they’re going to print insane amounts of money, then gold is a good way to preserve purchasing power and it will likely go higher over time. The same goes for platinum. It all comes down to the fact that as a commodity, these should trade around the marginal cost of production, which will likely increase with inflation.

As oil goes higher, it will drive production costs higher (mining is really just a big earth-moving operation). This should be bullish for metals, but a lot less bullish for miners as their margins get squeezed.

Any thoughts on the gold/silver ratio back toward 80:1 right now? 

I really have no opinion on the ratio between the two. It is just a ratio, but not particularly indicative of anything.

Silver around $23 is not particularly cheap compared to production costs. Remember, it’s flare gas. It’s super easy to recover more silver from the tailing stream. At current prices, they’ll recover more.

I can’t help but think an upcoming taper would be a vanilla directional negative for equity markets, as I have written. Will the Fed have the balls to taper the way they are telegraphing? What will markets do as a result?

The Fed is a very political organization, despite protestations that they are not. When everyone wanted higher asset prices, the government cheered the Fed to lower interest rates and flood the world with liquidity.

Now that inflation is roaring, politicians are complaining about inflation and demanding that the Fed “do something.” What can the Fed do about the price of tomatoes or heating oil? They don’t control these things. Government obstruction has made prices go crazy.

All the Fed can do is raise rates or QT and soak up liquidity. I assume they’ll do a bit of both, and it won’t matter to the price of oil because politicians won’t allow producers to produce more. As oil goes higher, the Fed will have far more pressure to act, and they’ll eventually panic, overshoot and crash the equity markets. Oil going parabolic will kill everything else.

Peter Schiff thinks next year will be inflationary. Jim Rickards has argued the opposite. Will the next year be deflationary or inflationary? Why or why not?

A bit of both. Inflationary assets will go screaming because supply will be artificially constricted by government stupidity, while risk assets will collapse as the Fed tries to control the price of tomatoes by raising rates and soaking up liquidity.

What’s your 1 year, 5 year and 10 year outlook on uranium? I know you are a bull like me, but how much patience is going to be necessary?

One day they’ll have finished soaking up the aboveground uranium stockpile and the price will go crazy. I don’t know when, but if they produce less than they consume, it’s inevitable.

5 Largest Uranium Producers in the World | INN

Then, a few years later, mothballed mines will be restarted, and the price will collapse. This is the history of commodities. They overshoot in both directions. I just think that uranium will overshoot far more dramatically than most commodities as there is a limited supply of it and a nuclear facility without access to uranium is a multi-billion-dollar paperweight.

Unlike many other commodities, higher prices will not curtail demand.

As a result, these utilities will panic and pay up to acquire uranium once the price gets going and that will send the price to some crazy level. In terms of timing, I have no idea when, but if Sprott keeps buying a few million pounds a month, that’s bound to accelerate it. I think the supply gets soaked up in 2022 and this theme gets a lot more traction soon. 

Part 2 of this interview can be found here.

Now read:

  1. Capitalism And Common Sense Will End Vaccine Mandates In 2022

  2. Oil Traders Will Break The Back Of The Fed

  3. Short The Whole F*cking Vaccine Thing

  4. Covid Has Evolved Into A “Mental Disorder”: Harris Kupperman

ZeroHedge readers always get 20% off a subscription to my blog using this link: GET 20% OFF FOR LIFE


All content is Harris Kupperman’s opinion. I own physical silver, GLD, GDX, GDXJ, PAAS, PSLV and a number of other metals/miners/gold/silver equities as well as numerous companies with exposure to oil and uranium. Readers should assume Harris also has positions in all trends/equities/etc. mentioned in this interview – as do I. We will likely stand to benefit if prices of commodities rise and/or our prognostications come true. None of this is a solicitation to buy or sell securities. It is only a look into personal opinions and personal portfolios. Positions can change immediately as soon as I publish this, with or without notice. These are not the opinions of any of my employers, partners, or associates. I get shit wrong a lot. I’m not a financial advisor, I hold no licenses or registrations and am not qualified to give advice on anything, let alone finance or medicine. Talk to your doctor, talk to your financial advisor or your therapist. You are on your own. Do not make decisions based on my blog. I exist on the fringe.

Tyler Durden
Fri, 01/21/2022 – 12:20

Author: Tyler Durden

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Ethereum Price Predictions: Where Can the ETH Crypto Go After Crashing Below $3,000?

The cryptocurrency market is currently undergoing a brutal pullback and not even mainstays can avoid the onslaught. Over the past 24 hours, 95 of the top…

The cryptocurrency market is currently undergoing a brutal pullback and not even mainstays can avoid the onslaught. Over the past 24 hours, 95 of the top 100 cryptos are in the red, some by remarkably sizable margins. Ethereum (CCC:ETH-USD) price predictions are in focus today as investors figure out if today’s drop is foresight into future woes.

A concept image of mining an Ethereum (ETH) token.Source: Shutterstock

What do you need to know about the ETH crypto today?

Ethereum is down nearly 13% this morning as part of the crypto pullback. All told, the crypto market is on track to lose over $500 billion in total market capitalization. The second-largest crypto by market cap, Ethereum is the building block for cryptos across the world.

There are a number of plausible reasons for the crypto decline today. Luckily, none of the theories are necessarily related to the health of digital assets in concept. Some believe the fear of inflation, which has been running rampant of late, has finally trickled down to the crypto market. This is reinforced by increasing correlations between alternative assets and equity markets.

Additionally, more and more funds have direct or indirect ties to many cryptos, especially Bitcoin (CCC:BTC-USD). This further increases ties between the crypto market and Wall Street trends.

The last major theory being thrown around is more geopolitical in nature. Yesterday, Russia’s central bank proposed banning the use and mining of cryptocurrencies. Russia is a major hub for Bitcoin mining. Should a ban of this kind be passed, the consequences would likely reverberate across the global crypto markets, as it is today. “The growth of cryptocurrencies use creates threats for Russian retail investors, financial stability and threats associated with the use of cryptocurrencies for illicit activities,” the bank stated.

With Ethereum sitting at a nearly one-year low, let’s see where the experts think the coin is heading.

Ethereum Price Predictions

  • Wallet Investor believes today’s drop to $2,840.98 per coin is little more than a road bump. They platform has a one-year forecast of $6,352.47 per coin. In the long term, it is still bullish on the coin, setting a 2027 price target of $18,492.
  • CryptoNewsZ is also bullish on the ETH crypto. The site predicts the coin can approach or surpass the $8,500 psychological resistance next year and predicts a minimum of $10,300 per coin in 2025.
  • Digital Coin has faith in Ethereum’s growth this year and in the future. It set a 2022 price target of $3,873.86 per coin. By 2025, it forecasts that the coin will hit $5,941.19. However, it sees 2025 as a relative peak, as the 2026 price target is just $5,512.12, a $400 discount from the year prior.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

More From InvestorPlace

The post Ethereum Price Predictions: Where Can the ETH Crypto Go After Crashing Below $3,000? appeared first on InvestorPlace.

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Author: Shrey Dua

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Precious Metals

Wage slaves vs gold owners, revisited

Inflation is the rate at which prices within a basket of goods or services (called the consumer price index or CPI) rise or fall. When a currency…

Wage slaves vs gold owners, revisited


Inflation is the rate at which prices within a basket of goods or services (called the consumer price index or CPI) rise or fall. When a currency falls, the ability of that unit of money to purchase goods and services weakens, i.e., it takes more units of currency to buy the same basket of goods as before it weakened. The more a currency falls, the less you can buy with it because its purchasing power decreases. We call this devaluation/ loss of purchasing power.

Loss of purchasing power

We know from a previous article that the purchasing power of most Americans earning wages or collecting a salary, has stagnated.

According to the Pew Research Center, from 1973 to 2018 the compensation of the typical US worker only grew about 12%. During the same period, the hourly median wage went up less than 10% in real (after inflation) dollars, or an average annual raise of barely 4 cents.

Real wages among the lowest-paid workers have fared even worse, increasing just 4.3% between 1979 and 2018.

Americans’ paychecks may have increased but their purchasing power hasn’t. According to Pew, despite some ups and downs over the past several decades, the real average wage in 2018 had the same purchasing power it did in 1978. 

This is all down to inflation and the inability of fiat currencies to protect against it.

Admittedly the pandemic has somewhat reversed this trend, but inflation has also skyrocketed.

The chart below by Trading Economics shows US wage and salaries growth holding steady at about 5% since 2017, decreasing in the early part of 2020, then climbing sharply in 2021, as the US economy experienced a shortage of workers. In fact in the three months ending in September, pay jumped 1.5%, the most in 20 years. Why?

Employees have been quitting their jobs in droves, with many preferring to stay home and collect “stimmy checks”. Covid-19 has also restricted immigration. According to Axios, there are about 2 million fewer immigrants in the US because of covid immigration restrictions, about 1.5 million fewer mothers of school-aged children are working, compared to pre-pandemic times, and there were 3.3 million more retirees in October 2021 versus January 2020.  

The dearth of workers has hiked wages and salaries, but significant and persistent inflation has done away with the gains in most cases. In October 2021 average hourly earnings increased by 0.4%, but inflation for the month increased 0.9%, meaning a -0.5% decrease in real average hourly earnings.

According to the Labor Department, wages swelled from April 2020 to April 2021, with average hourly earnings up 4.9% in October, but compared with inflation, real hourly wages actually declined more than 1.2% during the same period.

“For now, inflation is going to continue to run above very solid wage growth,” CNBC quoted Joseph LaVorgna, chief economist for the Americas at Natixis and former chief economist for the National Economic Council during the Trump administration.

A survey of 5,365 adults done for the New York Times, found only 17% of workers received wage increases that kept up with inflation.

While the Consumer Price Index (CPI) rose 6.8% in November, a nearly four-decade high, average hourly earnings increased just 4.8%. Other measures show pay gains lagging price increases, the newspaper states.

US wages have failed to keep up with the rate of inflation. The wage and salary earner is literally getting screwed every day because the value of the dollar is being devalued by a fractionally small amount. Over time, however, the diminished value is huge.

In the US there was an increase in inflation for every decade except the Depression. The dollar has lost 90% of its purchasing power since 1950.

It’s important to understand that the US Federal Reserve’s concept of inflation is different from both the official statistic and the reality in the economy. The Consumer Price Index (CPI) is currently 7%, which is the highest since 1982 — a 40-year high. This is the number most quoted in the financial press; it is the official inflation rate.

But the Fed when it talks about inflation, has since 2012 referred to the “Personal Consumption Expenditures” (PCE) price index. Core PCE inflation excludes food and fuel, supposedly because they’re too volatile, but the fact that the two most essential price categories are left out, means the Fed is deliberately underestimating true inflation.

Real “on the ground” inflation is much higher. CPI’s less known but more accurate cousin is the Producer Prices Index (PPI). Unlike CPI, which is crafted by bean counters, the PPI is based on information from actual producers of goods and services. The numbers don’t lie.

The latest PPI data point clocked in at 9.7% for 2021 — close to double-digit inflation.

It must also be pointed out that the government does not calculate inflation like it used to. John Williams’ Shadow Government Statistics published two charts, one showing inflation today if it was calculated the same way it was in 1990, the second showing inflation today using 1980’s methodology.

The latter reveals the actual inflation rate today is 15%, not 7%.

According to Williams, Over the decades, the BLS [Bureau of Labor Statistics] has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that neither reflects the constant-standard-of-living concept nor measures adequately most of what consumers view as out-of-pocket expenditures. 

For example of the current consumer price index (CPI), 24% represents the category “homeowners’ equivalent rent of residences.” Instead of reflecting a measure of home prices, as was the case before 1983, the BLS bases this figure on surveys that ask what homeowners think their home might rent for.

Williams says the aggregate impact of inflation reporting changes since 1980 have reduced the level of annual CPI by roughly seven percentage points. The effect has been a significant under-reporting of official inflation, so as to cut annual cost of living adjustment to Social Security, etc.

A comparison between using gold versus dollars to buy a basket of breakfast groceries — milk, eggs, bread and bacon, and the gas to go get them — is illustrative.


Milk: $1.32 per gallon
Eggs: 60¢ per dozen 
Bread: 70¢
Bacon: 85¢ – 95¢ per pound
Gasoline: 36¢ a gallon

December 2021 (US Bureau of Labor Statistics latest numbers)

Milk: $3.74 per gallon
Eggs: $1.78 per dozen
Bread: $1.53
Bacon: $7.21 per pound
Gasoline: $3.40 a gallon

Selling an ounce of gold in 2022 would give you about $1,813 — a 51X increase over the $35/oz gold in 1970. Obviously $1,813 buys a hell of a lot more breakfast groceries than $35 — you could probably feed an entire football team, including coaches and trainers, with everybody coming up for seconds.

The point is a grocery shopper using gold as a currency rather than dollars in 2022 would see a 51-fold increase in their purchasing power.

The shopper using dollars by contrast loses about 40% of their purchasing power because the prices of their grocery items have at least doubled or in the case of bacon increased by a factor of seven.

Which has been the better store of value, dollars, or gold? Obviously, it is gold — the only safe haven that protects the holder against rampant inflation caused by money-printing.

Loser bonds

There is another way that governments and the mainstream financial system keeps average Joes and Janes in check, and that is the purchase of government bonds, which in the United States, are known as Treasury bills (or notes).

Ever since the US dollar became the reserve currency in 1944, a decision made by the Bretton Woods delegation of 44 Allied countries, long-term US bonds, like the 30-year and the 10-year, have been held in high esteem by foreign governments, corporations and individuals.

When there is low confidence in the economy, people want safe investments, and US Treasuries are considered among the safest — the logic being that the US government would never stop paying interest to bondholders.

Demand for Treasuries bids up their prices and yields fall. Conversely, when confidence returns, investors dump their bonds, thinking they do not need to play it safe. This causes bond prices to sink and yields to climb.

Bondholders and the US government (through the Treasury) that issues them have a symbiotic relationship. Washington needs domestic and foreign entities to buy its debt, so that it can continue to run deficits, which keep getting added to the debt, now at $29 trillion. Treasury buyers simply need the government to be able to pay them back their principal plus interest when the bond matures.

Lately however this relationship has developed some cracks. In a recent article we found a leveling off of foreign purchases of US Treasury bonds and notes. Instead of foreigners buying T-bills, it is increasingly Americans, including consumers, banks and the biggest buyer of them all, the US Federal Reserve.

We have also identified an even more interesting trend. With 7% US inflation climbing faster and it being “stickier” than anticipated, the Fed has few policy options at its disposal. The horrendous yields on US Treasuries make them a poor investment, something foreign investors have already realized and US bond-buyers will surely cotton onto soon as well.

This practically guarantees the continuation of Fed bond buying (QE) despite the much-ballyhooed taper. As for raising rates, we have proven that the Fed can’t do it, at least not at the levels required to beat 4% inflation. We are talking about interest costs nearing a trillion dollars per year, when the deficit is accounted for. 

Yet the Ponzi scheme continues: the government needs to spend big to get re-elected, but they don’t have the money, so they borrow it (issue Treasuries) or they print it (they could raise taxes, but that is political suicide). Treasuries are considered a safe investment, so the government doesn’t worry about keeping on issuing them — like soap, diapers and gasoline, they will also finding a willing buyer, even as bond prices rise and yields plummet.

This is well-illustrated in the chart below by Longtermtrends, where the black line is the nominal interest rate of a 1-year US Treasury bond, the red line is the inflation rate and the blue line is the real interest rate. The chart shows that, adjusted for inflation, the yields on US Treasuries have often been negative.

Nominal vs real interest rate vs inflation. Source:

A couple of data points bear analyzing. Note inflation (in red) spiking in 1975 and 1980. In 1980, interest rates of 10% are surpassed by 15% inflation, resulting in a negative return on the 1-year, of -5%. In fact the real yield is negative for about half of the 46-year time-span between 1975 and 2021 (where the blue line is in the pink, 1975-80 and 2003-21)

Why would anyone buy a US government bond, when its “real” return, i.e., yield minus inflation, is negative?

Long-time bond watcher James Paulsen wanted to know, so he penned a note to clients entitled “Bonds are BAD!”. Forbes covered the topic in a Dec. 6, 2021 article.

Start with the assumption that many investors have learned the “60-40” rule, where bonds are considered a good way of offsetting the volatility of stocks (60% stocks, 40% bonds) while providing an income/ yield. The mix worked well for most of the past four decades, with the declining interest rates following the early 1980s peak, providing a tailwind for both asset classes. When stocks went down, bonds would invariably rally, as rates were dropped.

But when Paulsen took a longer view, going back as far as 1926, he noticed there was a sharp difference in the stock-bond return relationship when the benchmark 10-year Treasury yield was above 3% versus when it was lower.

The near-century of data found that when the 10-year yield was over 3%, bonds returned 4.6% and stocks returned 6.8%. Bonds also saw positive monthly real returns 57% of the time, which was just one percentage point less than stocks.

When the 10-year yielded less than 3%, as it does now, stocks enjoyed a 14% inflation-adjusted return while bonds gained 0%. Meanwhile stocks only dropped 35% of months, compared to 49% for bonds.

Barrons concludes, taking refuge in bonds whenever stocks have an inevitable correction may not offer safety

So why do investors do it? BlackRock offers some answers in a September, 2021 piece, ‘Understanding real interest rates’.

Noting that real yields have been pushing more and more negative, since September 2018 (see chart below), Blackrock identifies three types of investors who [continue] to gobble up these negative real-yielding assets. They are: foreign investors, who despite nominal US yields being so low, have developing-country yields that are even lower; institutional investors like pension funds who must buy Treasuries to fund longer-term liabilities and cash flows they must pay in future; and algorithmic-based investors that hedge portfolios by responding quickly to bond price changes. Lately they have shifted from “going short” (selling US Treasuries) to going long (buying US Treasuries). This boosts demand for Treasuries, and their prices, and pushes down their yields.

These investors all have one thing in commons, states BlackRock: none of them are buying Treasuries because they are cheaply priced or have a strong long-term return potential.

Source: Bloomberg, as of 9/6/2021

The world’s largest asset manager with US$10 trillion AUM, also observes that low US Treasury rates are resulting in pathetic yields everywhere else in fixed income markets — creating a major problem in the face of higher inflation.

With high-quality bonds like Treasuries, mortgages and investment-grade corporate debt resulting in strongly negative real annual yields, to gain any positive real yields, investors are having to go to much lower-quality bonds, including junk bonds (most of which are also negative).

The bottom line?

For investors who care about bond economics and the “real” rate of return, many have turned to finding higher nominal yields in riskier areas of the fixed income market. This strategy comes at the cost of sacrificing the safety of bond allocations and reduces diversification potential if equity markets sell off. To that end, the real problem of negative real yields looks like it is here to stay and makes rethinking the 60/40 portfolio framework more imperative than ever.

Nominal yields and real yields by sector. Source: Bloomberg, as of 8/31/21, via BlackRock

Real yields and gold

Of course, real interest rates correlate strongly to gold prices. The reason for this is simple, when real interest rates are below zero, cash and bonds fall out of favor because the real return is lower than inflation. Gold is the most proven investment to offer a return greater than inflation, by its rising price, or at least not a loss of purchasing power.

Historically, we can see the inverse relationship between negative real interest rates and gold, by charting the gold price and the 10-year Treasury’s yield after inflation.

In an article titled ‘The Golden Dilemma’, authors Claude Erb and Campbell found a near-perfect negative correlation of -0.82 (-1 being a perfect negative correlation) between real interest rates and gold prices between 1997 and 2012. Going back further in history, when real interest rates turned negative during the second half of the 1970s, gold moved as high as $1,900 an ounce, as real rates plummeted as low as -6%. When Paul Volcker, Fed Chair under President Carter and Reagan, hiked short-term nominal interest rates, real rates returned to positive, ending gold’s run. In fact, the gold price continued to drift downward, reaching a 30-year low under $400 an ounce in 2001. The gold bull market of 2010 to 2013 is easily seen in juxtaposition with negative real interest rates which bottomed out at around -4% during that same period.

Historical real rate of inflation versus gold

In the FRED chart below, notice that the gold price between 2013 and 2020 never gets above $1,400, corresponding to the period when the real yield on the 10-year is between about 0% and 1%. However, when real yields “go negative,” as they did around 2011-13, and in 2020, gold prices jumped.

2020’s 22% increase in the gold price was due to pandemic fears, combined with a low US dollar and plunging Treasury yields, causing real yields to go negative even though inflation stayed below 2%.

Gold prices jump when real yields “go negative,” as they did around 2011-13, and in 2020.

2020’s dramatic bond rally drove down yields across the world. On March 8, 2020, the US 10-year Treasury note reached an all-time low of -0.38%; two days earlier the German “bund” fell to a record -0.74%.

Investors piled into sovereign debt based on expectations of monetary stimulus like financial crisis-era easing programs that pushed down interest rates to zero and sparked a multi-year rally in stocks. 

Gold and debt to GDP

Gold also tracks the debt to GDP ratio closely, an important metric economists use for comparing a country’s total debt to its gross domestic product (GDP).

The percentage arrived at by dividing the country’s total GDP by its total debt indicates the country’s ability to pay back its loans. The higher the percentage, the higher the risk of a country being unable to pay the interest on its debt, and therefore defaulting on its debt. (countries with high debt-to-GDP ratios typically have trouble paying off debts. Because they are a higher risk to paying loans back, creditors demand higher interest rates. If a country’s debt-to-GDP ratio becomes too extravagant, creditors may stop lending to it altogether)

Apart from telling us which countries are good and bad credit risks, the debt-to-GDP ratio can also help in predicting the price of gold. The chart below, by the Federal Reserve Bank of St. Louis, compares total US public debt as a percentage of GDP, to the London Bullion Market gold fixing price.

As the debt-to-GDP-ratio rises, either because of a drop in GDP due to a recession, or a jump in government borrowing that piles up debt, or both, the gold price reacts. 

During the rounds of QE conducted by the US Federal Reserve, starting in 2008, the Fed increased the money supply by $4 trillion. But there was also a massive fiscal stimulus package launched to get the economy moving again. Bailing out the banks cost $250 billion and the American Recovery and Reinvestment Act added $242 billion to budget deficits in 2009 and $400 billion in 2010. 

We see the debt-to-GDP ratio jump from 62% in 2007 to 83% in 2009, 90% in 2010, and it has kept climbing ever since; it is currently at 127.3%, according to

US national debt, debt to GDP ratio. Source:

Role of the Fed

This wouldn’t be possible without the US Federal Reserve.

The Fed operates as a central bank, controlling fiscal and monetary policy. Its three goals are to promote maximum employment, keep prices stable (ie. control inflation) and to moderate long-term interest rates. But the Fed is “independent” in that it is not a part of the US government. While the US President appoints its seven-member board of governors, including its chair (appointments must be approved by the Senate), he has no direct control over its policies – though he’d certainly like to.

Over the years this set-up has led to frequent conflicts between US Presidents and the Federal Reserve. A column on CNBC notes that while Presidents Clinton and Bush II avoided criticizing the Fed, they are the exceptions not the norm.

So how did the US come to have a central bank that is independent from the government, anyway? It all goes back to November 22, 1910, when a delegation of the nation’s leading financiers, led by Senator Nelson Aldrich, left New Jersey for a secret 10-day meeting on Jekyll Island, Georgia.

Among the attendees are some now-familiar American family banking names: 

  • Frank Vanderlip, president of the National City Bank of New York, associated with the Rockefellers
  • Henry P. Davison, senior partner of J.P. Morgan Company, regarded as Morgan’s personal emissary
  • Charles D. Norton, president of the Morgan-dominated First National Bank of New York
  • Col. Edward House, who would later become President Woodrow Wilson’s closest adviser and founder of the Council on Foreign Relations
  • Benjamin Strong, a lieutenant of J.P. Morgan
  • Paul Warburg, a recent immigrant from Germany who had joined the banking house of Kuhn, Loeb and Company, New York directed the proceedings and wrote the primary features of what would be called the Aldrich Plan.

The Fed began with approximately 300 people, representatives of banks who became owners (stockholders purchased stock at $100 per share) of the Federal Reserve Banking System. 100% of its shareholders are private banks; the stock is not publicly traded and none of its stock is owned by the US government.

The Federal Reserve Bank (Fed) is a privately-owned company (Wikipedia describes the Fed as a “complex business-government partnership that rules the financial world”) that controls and profits immensely by printing money through the US Treasury and loaning money out to commercial banks.

Between 2008 and 2015 the Fed bought trillions of dollars worth of T-bills and mortgage-backed securities, keeping interest rates near zero percent, but making the US debt balloon from $900 billion to $4.5 trillion. After a brief hiatus, QE was re-started, as a reaction to the coronavirus pandemic.

Since the fourth round of QE began in the spring of 2020, the Fed’s total assets have more than doubled, to $8.7 trillion.

Fed balance sheet. Source: US Federal Reserve

The whole point of creating the Federal Reserve System was to give the new central bank (the Fed) control over the money supply – having been spooked by the crisis of 1907. Here a bit of history is useful, courtesy of former US Senator Ron Paul and Lewis Lehrman’s ‘The Case for Gold’ — written back in 1983. 

In their seminal work of economic history, Paul and Lehrman go right back to the beginning of what they call “The Present Monetary Crisis” when in 1784, Thomas Jefferson said, “If we determine that a dollar shall be our unit, we must then say with precision what a dollar is.” 

The founding fathers followed his advice and in 1792 defined one dollar as 371 grains of silver. From then until 1971, the dollar was defined by a weight of either silver or gold, but since 1971, when President Nixon abandoned the gold standard, the dollar remains undefined by a physical value. The greenback is really nothing more than a piece of paper printed with government ink and imbued with the subjective value that a $1 bill is in fact worth the 100 cents the government says it is worth. 

In 1900 the governing Republicans officially announced the gold standard. All paper money was to be redeemable in gold, and silver continued as a subsidiary metal. The problem was that between 1897 and 1914, an increase in gold production pushed the gold supply up by 7.5%. However the amount of cash deposits during the same period overwhelmed the amount of gold in bank vaults — total bank deposits increased 317.5% to gold’s 7.5% rise. In 1907 the Treasury was called upon to bail out the banks that ran short on cash, resulting in an agreed need for some form of central banking. 

Hence the 1910 meeting at Jekyll lsland, Georgia and the creation of the US Federal Reserve. 

An instrument of inflation 

Paul and Lehrman explain how by creating the US Federal Reserve System, the government invited persistent inflation: 

By establishing the Federal Reserve System, the federal government changed the base of the banking pyramid to the Federal Reserve Banks. Only the Federal Reserve could now print cash, and all member banks could now multiply their deposits on top of Federal Reserve deposits. All national banks were required to join the Federal Reserve, and their gold and other lawful money reserves had to be transferred to the Federal Reserve. The Federal Reserve, in turn, could pyramid its deposits by three-to-one on top of gold. This centralization created an enormous potential for inflationary expansion of bank deposits. Not only that, reserve requirements for the nation’s banks were deliberately cut in half in the course of establishing the Federal Reserve System, thereby inviting the rapid doubling of the money supply. Average reserve requirements for all banks prior to the Federal Reserve Act is estimated to be 21 percent. In the original Act of 1913, these were cut to 11.6 percent and three years later to 9.8 percent. It is clear then that the Federal Reserve was designed from the very beginning to be an instrument for a uniform and coordinated inflation of bank money.

Indeed, total bank deposits were $14.0 billion at the beginning of the Federal Reserve System in January 1914; after six years, in January 1920, total bank deposits had reached $29.4 billion, an enormous increase of 110 percent or 18.3 percent per year. The creation of the Federal Reserve had made that expansion possible. 

Yet it was nothing compared to what would come after 1971, when President Nixon announced that no more gold would be given in exchange for dollars. “There were now absolutely no checks on the availability of the United States to inflate,” states the Paul and Lehrman report.

In a clear reference to the inflationary 1980s, the authors conclude that There has never, in peacetime American history, been any sustained rate of inflation to match the inflation since 1941. The same, in fact, is true of wartime, which at least has never lasted more than a few years. And it is not an accident that the highest, most accelerated rate of inflation has taken place since 1971, when the United States went off the international aspects of the gold standard and went over completely to fiat paper. 

And in the forward to the report:

[All] the effort and planning imaginable cannot make paper money work. There is no way paper can be “improved” as money. Whenever governments are granted power to purchase their own debt, they never fail to do so, eventually destroying the value of the currency. Political money always fails because free people eventually reject it. For short periods individual countries can tell their citizens to use paper, but only at the sacrifice of personal and economic liberty.

The Fed’s ability to print money on a whim, to “purchase their own debt” in the words of Ron Paul and Lewis Lehrman, is best exemplified by the quantitative easing programs that followed the 2008 financial crisis, in that case the popping of the US housing market bubble, elevated out of control via easy credit and toxic bank loans. 

Fourteen years later the US debt sits at $29 trillion and counting. The World Bank has warned of the risks of a new global debt crisis – pointing to the latest of four waves of debt accumulation over the past 150 years. 

The current wave which the Washington, DC-based group says started in 2010, is thought to be “the largest, fastest and most broad-based increase” in global borrowing since the 1970s, CNN reports

In the first quarter of 2019, world debt hit $246.5 trillion, reversing a trend that started in the beginning of 2018, of reducing debt burdens, when global debt reached its highest on record, $248 trillion.

We’ve written extensively about the dangers of the mounting US debt load.  

The country is accumulating about the same amount of debt as its annual economic output. Each year another trillion dollars gets added to the national debt.

The Congressional Budget Office (CBO) and the Committee for a Responsible Federal Budget (CRFB) — both reliable sources — project a deficit of $1.3T in 2022, and every year until 2031.

As an indication of how far removed we are from the gold standard era, when governments were unable to freely print money or borrow, because the dollar was fixed to gold (1 oz = $35) consider the fact that US debt is growing a lot faster than above-ground gold inventories. According to Gold Broker, over the past 10 years the federal debt has doubled but the above-ground stock of gold has only grown 17%. 

Moreover, the total US debt to GDP ratio is at a record 370% (all debt including public, corporate and household debt).

Visual Capitalist created an interesting infographic that compared debt growth to gold and silver coin production during the Obama and Trump presidencies. It found that US gold coins minted dropped from $6.7 billion in Obama’s first term, to $2.9B in Trump’s term (to Oct. 26, 2020) and $3.7B in silver coins minted fell to $1.4B during the same time frame.

In Trump’s term, the value of US debt was almost $1,600 times higher than the value of minted silver and gold coins combined.


It’s not a stretch to envision a scenario whereby the world’s reserve currency, the US dollar, collapses under the weight of unmanageable debt, triggered say, by a mass offloading of US Treasuries by foreign countries, that own about $7.5 trillion of US debt (a selloff may also occur due to investors sick of getting such low yields for their US government bonds).

This would cause the dollar to crash, and interest rates would go through the roof, choking consumer and business borrowing. Import prices would skyrocket too, the result of a low dollar, hitting consumers in the pocket-book for everything not made in the USA. Business confidence would plummet, mass layoffs would occur, growth would stop, and the US would enter a recession.

Owning gold (and silver) continues to be the best defense against inflation, stagflation, and rampant currency debasement, during this period of unprecedented and irresponsible debt accumulation.

Also, when government can’t offer a positive real return, gold usually functions as the asset of last resort.

Richard (Rick) Mills
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