Gold should, in the fullness of time, continue to roughly keep up with that pace. Gold’s local peak in August corresponded with the low in real yields, at -1.08%.
If Treasury bonds keep pace with inflation, it can keep gold from overheating too much, but gold should, over a 3–5 year period, do rather well regardless.
The Endgame Gold Spike
There is an endgame scenario that can shoot gold way past my model to the upside, and it remains my long-term base case, although I don’t strongly plan my gold target around it in any given year, since its timing is hard to predict. This endgame scenario that I’m describing would be a sharp rise in broad consumer price inflation, combined with formal yield curve control by the Federal Reserve. The mechanism is that the central bank prints money and buys as many bonds as needed to enforce that peg. Here’s a chart of official CPI and 10-year Treasury yields in the 1940’s decade, showing that no matter how high CPI spiked, the Fed held yields at 2.
If policymakers succeed in generating 3% inflation or higher at some point in this cycle, but don’t want Treasury yields to go much above, say, 2%, then yield curve control becomes quite probable in my view. At that point where formal yield curve control is used, the bid for gold and other hard assets from portions of the cash market and bond market could become quite intense to defend against debasement, resulting in a 1970s-style gold price spike. Gold, silver, Bitcoin, and industrial commodities could all benefit. With sharp enough demand, it could potentially blow up the futures market’s ability to physically deliver gold, which could further elevate the price of any «real» gold that is physical or fully-allocated, compared to some of the paper market.
It’s the percentage of broad money supply theoretically backed by US Treasury official gold holdings, at current prices. Although the broader market is starting to wake up to a reflation narrative and the potential for commodity outperformance, big index money is still heavily in the S&P 500 and bond market, rather than in these more contrarian areas. There is plenty of runway in the years ahead for commodity and hard asset sectors to do well vs the broader indices, as oceans of money allocate even a small bit towards these assets that are mere ponds in comparison.
Source: Lyn Alden | Gold Eagle
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