Pro Perspectives 8/15/19

August 15, 2019

The move in global bond yields (market interest rates) continue to plunge today.

The U.S. 10 year broke 1.50%.  German 10-year yields traded to (again) new record lows of negative 70 basis points.

You can see in the chart below that this move in yields is triggering global capital flows into gold. 

Interestingly, while we have geopolitical chaos dominating the news wires everyday, if we look back at the month of December, we may find the real driver of this blood-bath in yields.  It's the reality that the major central banks (led by the Fed) were too aggressive in moving away from emergency level policy. 

On December 13th, the ECB officially ended QE (its nearly $3 trillion bond buying program).  German yields were 30 basis points that day.  And we have not seen that level since.  Now German yields are 100 basis points lower (and in negative territory).  

A few days later, with the ECB now out of the QE business, the Fed made yet another rate hike and told us all that their quantitative tightening program was on “automatic pilot.”  The U.S. 10-year yield was trading 2.86% that day.  We haven't seen that level since.  The 10-year yield has now been cut in half.

That one-two punch from the Fed and ECB was a toxic cocktail (in the, still, fragile post financial crisis environment) that meant a massive and rapid global liquidity withdrawal was underway (and that a very important shock absorber — the ECB — has exited the game). 

If you bought gold the day the Fed's December rate hike, you've never been underwater.  It's up 24%.  This is global capital exchanging paper currency for hard currency, foreseeing more money printing.  Gold is being revalued to global paper currencies – which should ultimately translate into higher broader commodities prices (not just gold). 

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