Gold prices surging to record highs amid rising U.S. debt and elevated bond yields
NEW YORK (October 30) Not only have gold prices pushed to $2,800 an ounce, continuing their unstoppable rally, but they have also managed to hit new all-time highs even as bond yields remain relatively elevated.
Momentum in the gold market comes as the yield on U.S. 10-year notes has pushed back above 4% and is currently trading near a three-month high. Some analysts have said that the rise in U.S. bond yields is not surprising, as the U.S. economy and its labor market remain fairly resilient.
However, in an interview with Kitco News, Ryan McIntyre, Managing Partner at Sprott Inc., said that he sees another factor pushing bond yields higher. He explained that growing U.S. debt could be weighing on investors.
“The question is, as U.S. debt continues to rise, what is the yield needed to attract new investors to the market?” he said. “I think we are in an early phase where investors are starting to get worried about U.S. debt. People are starting to wonder if there could be more inflation and more debasement of the currency.”
McIntyre noted that it’s not just the size of U.S. government debt, which is now more than $35 trillion, but also the trajectory. He mentioned that debt is growing at an astronomical pace as the U.S. economy remains relatively healthy.
“What is going to happen when the U.S. economy falls into a recession?” he asked. “How much are they going to have to spend to kick-start an economy that is slowing? We are really testing the bounds of historic debt levels, and it is causing some investors to think twice.”
McIntyre said that despite higher bond yields, this is actually the perfect environment for gold, which is why prices have seen an unprecedented rally.
“Gold is the only asset that is completely independent and a recognized safe-haven asset,” he said.
But it is not just gold that is benefiting in this environment; McIntyre said that he suspects bitcoin’s new momentum, which has pushed prices above $70,000 and is on track to hit new record highs, reflects a similar sentiment.
“Anything that is seen as an alternative to the U.S. dollar is going to continue to do well,” he said.
Along with the U.S. dollar, McIntyre said that he expects equity markets to suffer as bond yields remain elevated. However, he added that gold has an edge over digital currency, as it has a proven track record as a safe-haven asset.
“A rising bond yield environment is extremely negative for equity markets,” he said. “This is a dangerous market to be in, and I think investors are looking at gold as a way to diversify their portfolios."
Gold’s latest push to $2,800 an ounce puts prices up 35% so far this year. While the yellow metal has had an impressive run, McIntyre said that the market still has unlimited upside potential.
In the current environment, with so much geopolitical and economic uncertainty, McIntyre said that he recommends investors hold around 10% of their net worth in physical gold. He added that investors should think about their gold position as part of their fixed income holdings as a risk hedge.
At the same time, McIntyre said that investors should consider a 5% tactical allocation in precious metals mining stocks, which would provide some leverage to the rising gold price.
For investors worried about costs, McIntyre said that it is important to look at gold in relation to other assets. He noted that, given U.S. equity market valuations, gold still looks relatively inexpensive.
“If we look at the landscape, whether it's U.S. equities, international equities, or emerging markets, those all have some pretty high valuations. And now look at the risks; there is plenty of uncertainty across the board. Unlike equities, gold is nowhere near priced to perfection.”
KitcoNews