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Normally, bond and gold prices move in tandem. For instance, if the Fed, say, cuts interest rates and expands the money supply, gold will advance as short-term bonds rally on the cut in rates.
Now, there are times when the prices diverge but right now we’re seeing something pretty extraordinary: Higher bond yields failed to attract any interest, and the increased selling today was met with even more vigorous buying in gold.
This sort of dislocation has a lot of traders wondering: “What’s the endgame here?” Can gold prices keep going up forever as bond prices keep falling?
Here’s where the tariffs come into play. Any attempt to move production to the United States is a direct threat to the dollar as a reserve currency. See, with 50% of available dollars held abroad, any increase in the selling of the dollar could increase the supply rapidly.
What’s causing dollar selling? Well, one source of dollar selling could be a result of defending the valuation of a currency… like… say… the Chinese yuan. Treasury holdings are converted to dollars and those dollars are sold to buy their own currency. However, in that process, some of the dollar selling may be in exchange for gold.
What’s happening is the new global trade paradigm is causing at least some flow into gold, hence the impact of gold prices – for now. The more Treasuries sold, the higher the flow into gold.
So, a historically positive correlation has been flipped on its head. Let’s take a look at what that means for traders…
