“The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it.” – John Steinbeck, The Grapes of Wrath
Something strange and somewhat senseless happened this week. On Tuesday, the price of gold jumped over $13 per ounce. This, in itself, is nothing too remarkable. However, at precisely the same time gold was jumping, the yield on the 10-Year Treasury note was slip sliding down to 2.15 percent.
In short, investors were simultaneously anticipating inflation and deflation. Naturally, this is a gross oversimplification. But it does make the point that something peculiar is going on with these markets.
Clear thinking and simple logic won’t make heads or tails of things. For example, late Wednesday and then into Thursday the reverse happened. Gold gave back practically all $13 per ounce it had gained on Tuesday, while the yield on the 10-Year Treasury note climbed back up to 2.19 percent. What to make of it?
Gold and treasury yields have been inversely correlated for some time. This is probably due to inflation expectations driving expectations about interest rate policy – click to enlarge.
With a little imagination one can conceive of where the money’s coming from to buy Treasury bonds. More than likely, it has something to do with central bank intervention into credit markets. Though, the Federal Reserve is not the only culprit.
If you recall, the Federal Reserve’s quantitative easing program concluded in late 2014. The Fed even says it plans to start shrinking its balance sheet later this year. So if the Fed’s not the source of liquidity for Treasury purchases, who is?
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