ChristopherCarrollSmith

Real bond yields drive gold and silver

QUANDL:FRED/DFII10   FRED/DFII10
This chart shows the price movement of gold and silver vs. real 10-year treasury bond yields, which are now at nearly -1%. As you can see, gold has a *very* strong inverse correlation with real 10-year bond yields. Silver is correlated too, but it has long periods of under- or out-performance vs. gold . One way to play this is to wait for silver to get far away from the gold /bond line and then buy or sell silver to benefit from a regression to the mean. I recently turned a nice profit on silver when it regressed to the mean after a long period of under-performance. That silver vs. gold trade is over for the moment.

Real bond yields are now at an all-time low, and there is so far no sign of a slowdown in their collapse. That's partly because of rising inflation expectations and the collapse of the US dollar vs. other currencies. If you're bearish on the dollar, you'll want to be long on gold and silver . If you believe the dollar will recover or that the Fed will take action to stabilize it, you'll want to be short on gold and silver . Personally I think the dollar is likely to find some support as its collapse draws attention from policymakers. Mnuchin has already signaled that the Fed is thinking about stabilization, and I'll be listening closely for more such signals at the FOMC meeting tomorrow.
Comment: After a little more research, it's looking like despite Treasury Secretary Mnuchin's comment about wanting a "stable" dollar, the Fed board is far more dovish and expected to signal tomorrow that it will stay the course on weakening the currency.
Comment: By the way, I meant to say that this chart shows INVERTED bond yields, so as bond yields fall, the blue line in this chart will rise.

Comments

Very interesting, it now looks like gold might have overcorrected lower? Do you think it could mean revert back up?
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@danilopena, perhaps a more accurate way to look at it is that gold had outpaced bond yields, and the current correction lower is the mean reversion. Here's a snapshot with the scales adjusted a little bit:

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danilopena ChristopherCarrollSmith
@ChristopherCarrollSmith, Thanks! Great
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Ay there it is! Finally
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Great insight, thanks Christopher!
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Great analysis,do you have anything on USD jpy.
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@CurtisTerry, TBH I don't trade forex. I keep an eye on $DXY because it affects things I do trade, like stocks and precious metals. However, Japan's credit rating downgrade to "Negative" from Fitch this morning can't be good for the Yen...
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interesting chart comparison. looks good!
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