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Rising bond yields will continue to block gold rally, said Tom Winmill, fund manager in Midas Fund. He warned investors that they are losing sight of the looming threat of currency depreciation and rising inflation, while paying particular attention to the bond market.
According to Winmill, bond yields have not only reached their highest level in almost a year, but have also grown significantly from 0.5% in August.
Fortunately, earlier this week, the gold market was able to get rid of the influence of the bond market, respectively trading above $ 1,800 per ounce.
But of course, bond yields may continue to rise in the near future. However, with all the debt the US government has accumulated in an effort to prop up the economy, a sell-off will not be sustainable. At the moment, US debt accounts for 133% of US GDP.
"Growing public debt is an impending problem to deal with," Winmill said. "If bond yields continue to rise, it will be difficult for the government to meet its obligations," he added.
Winmill pointed out that if yields continue to widen, the Federal Reserve, at some point, will be forced to buy Treasury bonds on its own. When that happens, investors will turn their attention back to inflation, which the central bank wants to exceed 2%.
But on Tuesday, Fed Chairman Jerome Powell refrained from commenting on the rising bond yields. Nevertheless, he said that overall yields are increasing because investors are anticipating a more "sustainable and complete economic recovery."
Powell also noted that the Federal Reserve is still far from achieving its goals and will continue to pursue adaptive monetary policy.
Winmill said that while the US Fed is relatively calm about the threat of inflation, official government figures do not reflect what is happening in the economy as a whole. Growing commodity prices, increasing house prices and the market value of securities are all signs of rising inflation. He added that consumers can see the impact of inflation through their grocery bills.
Hence, consumers will feel the tightening of inflation as energy prices continue to rise.
To add to that, inflation is penetrating the economy more and more, which creates a negative cycle.
"If the Fed starts to tighten the yield, it will be way behind the curve, which will be good for gold," Winmill said.
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