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Money Metals News Alert
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October 23, 2023 – Gold and silver prices headed higher last week. The metals were beneficiaries of some safe-haven buying. A drop in the U.S. dollar as measured by the DXY index also helped. The metals shrugged off a rise in interest rates.
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The 10-year Treasury note flirted with a 5% yield on Friday, the highest level in 15 years. With price inflation jumping once again, ballooning federal deficits, and major bond holders such as China dumping Treasuries, yields may have further to rise.
Unless a major buyer shows up, the supply of Treasury debt looks ready to overwhelm demand. This puts upward pressure on rates at the longer end of the yield curve.
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Frankly, there aren’t many likely bidders capable of taking on the coming deluge. The Fed is one such buyer, but officials there are not yet talking about a resumption of QE or whatever they will call the next round of debt monetization.
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Gold : Silver Ratio (as of Friday's closing prices) – 84.5 to 1
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What Happens to Gold When Bonds Are No Longer a Safe Haven?
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U.S. Treasury debt has long been considered a “risk free” asset. Gold bugs hold a different definition of risk free, but for most of Wall Street and the investing public the assumption has been that there’s zero chance the U.S. government will ever default on its debt.
The truth is finally dawning on this crowd. There is more than one way for the U.S. to default.
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The government might not welch on payments, though the chances of that certainly aren’t zero. It can surreptitiously default through inflation. What’s more, the risk of that type of default is 100% – it is happening now and figures to get worse.
Investors traditionally turn to bonds when there is economic uncertainty. Most retirees have been coached to overweight bonds to reduce volatility and risk in their portfolios. The past couple years have delivered a wakeup call.
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2022 was the worst year ever in the Treasury market. The 10-year yield jumped a full 2%. This year the carnage could be even worse as the bond bear market intensifies.
Banks and other financial institutions look at Treasuries as the ultimate collateral and as a Tier 1 reserve asset. But they, too, are getting a jolt of reality.
Small and mid-tier banks have been decimated by losses on the bonds held on their balance sheets.
The Federal Reserve implemented a backdoor bailout of those banks earlier this year.
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Fed officials created their “Bank Term Funding Program” to allow member banks to borrow against underwater bonds at 100 cents on the dollar rather than book losses on their actual market value. It’s an alternative to the fire sale of those deeply underwater assets to raise liquidity.
The loans have a 1-year term and the program was intended as a short-term measure.
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The Fed seems likely to renew the program indefinitely, or else the reckoning for banks will be biblical. Regardless of what happens, institutions have learned a lesson.
The question is what happens when banks and investors decide that Treasury debt is anything but “risk free.” The list of “go to” safe haven assets is small. If bonds no longer fit the bill and U.S. dollars are losing appeal for similar reasons, gold may be the last refuge.
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Key Economic Data Scheduled for This Week
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- Wednesday, October 25th – New Home Sales. Economists expect a slight uptick in sales of new homes. The forecast for September is 682,000 versus 675,000 annualized in August.
- Thursday, October 26th – GDP. Government economic data is less and less reliable as bureaucrats get more creative. GDP data has too much political implication to be left unmolested. The forecast for 3rd quarter GDP is 4.5%. That would be a massive improvement over the 2.1% reported for the second quarter.
- Friday, October 27th – Employment Report. Income growth is expected to hold steady at 0.4%, while spending is forecast to move higher by 0.5%. Expenses growing faster than incomes, as has been the plight of Americans in recent years.
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This week's Market Update was authored by Money Metals Director Clint Siegner.
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This copyrighted material may not be republished without express permission. Offer only available through email promotion. Offer does not apply to previous orders and may not be combined with any other offer or program. Special shipping rates or other restrictions may apply to international orders. The information presented here is for general educational purposes only. Money Metals Exchange and its staff do not act as personal investment advisors. Nor do we advocate the purchase or sale of any regulated security listed on any exchange for any specific individual. While our track record is excellent, investment markets have inherent risks and there can be no assurance of future profits. You are responsible for your investment decisions, and they should be made in consultation with your own advisors. By purchasing from Money Metals, you understand our company is not responsible for any losses caused by your investment decisions, nor do we have any claim to any market gains you may enjoy. Money Metals Exchange is not a regulated trading “exchange” as defined by the CFTC and the SEC.
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