The rise in the price of safe havens like gold and US treasury bonds is a result of rising geopolitical tension according to a majority of the mainstream financial press. However there is more to consider than the escalating rhetoric between the US and Russia, China and North Korea.
Gold has enjoyed a $40 jump since the beginning of the week. While the 10 year US treasury bond has seen a solid 1% increase in just the last three days.
While geopolitical tension has definitely played a role in investors scampering towards safe haven investments, there are other factors at play. Namely a speech given by Federal Reserve chair Janet Yellen on Monday.
In her remarks at the University of Michigan on Monday Janet Yellen stated that, “we (the Federal Reserve) are close to meeting our goals on both employment and inflation.”
She also stated that, “We (the US economy) is doing pretty well. The economy is growing at a moderate pace.
Both of those statements and others in her remarks point towards the Fed being on the path of raising rates again in the near future. The US equity markets have enjoyed a 91 month period of expansion. The average expansion or bull market has lasted 80 months since the beginning of the Reagan era. So while most analysts on Wall Street concede that the upcoming May FOMC meeting will not produce a rate hike, June is likely to bring another 25 basis point increase in rates.
These looming rate hikes scare investors who have enjoyed loose Fed policy for the last 8 years.
In previous statements Yellen has said that the Federal Reserve is willing to allow inflation to surpass their stated target of 2% inflation. That brings “real interest rates” into the conversation. Real interest rates are calculated by subtracting inflation from nominal interest rates (the number used by the Fed).
So what does all of this mean? Gold is benefiting from lower than perceived rates as well as serving as a safe haven for those investors who believe that rate hikes will mean the end of a long run for the bull market. Throw on top of all of that increased demand for gold from both the Russians and especially the Chinese and we have gold set to soar.
The story behind the rise in the price of US treasuries has significant overlap with the story behind gold with one major additional factor. Yes treasuries share the classification of safe haven. So that classification covers the elements of a possible end of the bull market as well as the foreign policy challenges the Trump administration is facing. The FOMC has addressed shrinking their balance sheet for the first time in their latest meeting. Yellen didn’t address this in her remarks on Monday but the thought of the Fed potentially flooding the market with at the least billions if not trillions in US treasuries would send the price of those securities soaring.
The Fed could be raising rates and allowing inflation to run hot in order to give themselves room to cut should a June and/or September rate hike(s) stagnate growth or even worse send the market diving in the opposite direction. If this turns out to be the case this could be just the beginning of a extended bull market for both gold and US treasuries.