Why gold (AMEX:GLD) is trading as a risk asset with equities and not a risk-averse asset is odd to me, but that is the situation. Gold is rising with bond yields along with equities. Now the last time I checked the gold bears were still of the opinion that once bond yields started to rise gold would be pulled down to somewhere south of $1200 per ounce. Well, since the U.S. treasury market topped on July 23rd, yields on the 10 year U.S. Treasury note (AMEX:UST) has risen from 1.382% to 1.845%, a 33.5% rise in yield.
Conversely, gold has risen from $1576.15 to $1615 per ounce on today, or a rise of 2.4%. Gold traded briefly below $1600 per ounce before the COMEX open this morning than exploded 1% higher to $1618 before flat-lining between $1614 and $1616 per ounce for the rest of the afternoon. The S&P 500 closed up 0.71% at 1415.52.
30 year U.S. bond futures, however, continue to drop like they are on fire, hitting a low of 145.14 before catching a bid and rebounding to trade around 145.6. This price action puts the price near the former peaks from last fall when the Euro-zone crisis over Greece was all the rage. Right now they are trading at a three month low. But there should be a lot of support here near 3%. It’ll be the break back above 3% that will tell us if the flow of dollars is truly overwhelming the Fed’s ability to sop them up in the short term. This is why gold is not trading like a risk-averse asset, but rather like an inflation asset. Bonds are massively over-valued and gold is the converse. A break above $1635 in gold and 3% in yield on the 30 year bond will start the next big bull run in gold.
If bonds keep sliding oil prices will continue to rise to offset it. With nearly 3 months left before the U.S. presidential election this rout in bonds may be ending soon in order to put a lid on oil and gasoline prices coming into the election. A buoyant equity market (AMEX:SPY), ie. the S&P 500 over 1400, plus gasoline back under $3.50 per gallon on average would be as good a result as I think can be managed for Obama’s re-election under the circumstances.
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