Gold and bonds are both considered to be safe havens. But in a recent podcast, Peter explained why bonds are not a safe haven in an inflationary environment. In fact, bonds – including US Treasuries – are risk assets when inflation is running hot. If you want safety from inflation, you need to buy gold.
Another gold rally fizzled this week when bond yields pushed up, sparked by rising oil prices. Peter said nothing happening in the bond market should have been a drag on gold and silver. Nevertheless, traders have consistently responded to rising yields or a steepening yield curve by selling gold and silver. The narrative is that rising rates are bearish for the metals — even though real rates remain negative.
Peter said this makes no sense.
Just because the rates are less negative doesn’t mean you have a negative environment for gold and silver. I think as long as rates are negative, that is a huge wind in the sails of gold and silver - because you want to avoid negative interest rates.”
The knock on gold and silver has always been that you forgo interest. Higher interest rates increase the opportunity cost of owning the metals. For example, if interest rates are 10% and you own gold, you’re giving up 10% interest on the money you have in the yellow metal. But when rates are negative, it doesn’t matter.
If they’re negative 2% or negative 10%, nobody wants a negative yield. So, as long as yields are negative, you want to get out of bonds. It doesn’t matter how negative. Once you’re losing, it’s a loss.”
Ultimately, a negative rate environment, no matter how negative, should be bullish for gold and silver.
The other tailwind for gold and silver is traders still expect the Federal Reserve to respond to inflation by tightening monetary policy – and thus raising interest rates.
Oil prices are rising as a result of inflation. Gold should also be rising as a result of inflation. It should not be falling because investors expect the Fed to fight inflation. Again, if the Fed could fight inflation, they’s be fighting it right now. The reason they’re not fighting it, the reason they’re pretending that it’s not a problem, and so there’s no need to fight it, is because they can’t. But they’re never going to admit that. That would be a complete disaster. So, they have to pretend that it’s transitory, that it’s not a real problem, but also pretend that if it ever becomes a real problem, well, they’re going to do something about it. But of course, they can’t do anything about it. So, they won’t.”
Most investors regard Treasuries as a safe haven. They move into bonds when they’re in a risk-off mood. But when inflation is the risk, Treasury bonds lose their safe-haven status. Peter said bonds are never a safe haven against inflation.
Inflation erodes away the purchasing power of all bonds.”
Peter emphasized that it’s got nothing to do with default risk. You’re not concerned about default in an inflationary environment.
You’re concerned about getting paid back in money that doesn’t have much value. It doesn’t matter about the credit quality. The highest credit quality bonds are no different from junk bonds when it comes to the inflation risk. They may be different when it comes to judging default risk. But this is not about default. This is about the value of the principle of the bond going down. So, even if you get repaid, you still are subject to the risk of inflation. So, when inflation is the risk, you don’t have any safety in US Treasuries. Alternatively, you have complete safety in gold. Gold is a safe haven from inflation and bonds are not.”
Nevertheless, investors continue to look at both assets as if they both have the same characteristics. They lump them together as safe-havens. But Peter said Treasuries are a risk asset when it comes to inflation.
They need to trade the opposite of gold. They’re not the same as gold. They’re different. Because gold has a real value. It is not a piece of paper. Gold is a hedge against inflation because gold is an actual commodity whose price rises as a result of inflation alongside of other commodities that also see higher prices in an inflationary environment. So, the two assets have to diverge. And at some point, they will. At some point, weakness in the bond market is going to stop translating to weakness in the gold and silver market when people start to realize how these two assets have actually diverged from one another and are serving completely different roles in the environment we have right now. Because, again, the risk-on asset in an inflationary environment is Treasuries.”
Peter thinks the markets will figure this out eventually.
In an inflationary environment — and we are in the most inflationary environment we’ve ever been in — the riskiest things you can own are bonds. And it doesn’t matter what bond you have. Treasuries are no safer than the riskiest junk bond when the threat is the loss of purchasing power to inflation. The real safe haven in this environment is gold. And as soon as investors understand the difference between gold and Treasuries, they will then start moving into gold as a safe haven, and they will not be deterred in their buying of gold when bonds go down because they will expect bonds to go down. When you’re looking to remove inflation risk from your portfolio, you sell bonds, including Treasuries, and you buy gold and silver.”
In this podcast, Peter also talks about the housing market, Zillow bailing out of the home-flipping business, Biden’s mischaracterization of inflation as a “high class” problem, the US using Soviet propaganda tactics to describe inflation, and the latest in the bitcoin market.