(Kitco News) - Rising bond yields are creating meaningful competition for gold as investors can once again generate attractive income from cash and fixed-income assets. However, persistent inflation, which continues to erode the purchasing power of fiat currencies, means the fundamental case for owning gold remains intact, according to one market strategist.
Gold prices remain under pressure at the start of a new trading week as the yield on U.S. 10-year bonds pushes to 5.32%, their highest level in nearly 20 years. Spot gold last traded at $4,134 an ounce, nearly unchanged on the day.
In an interview with Kitco News, Michael Khouw, chief strategist at YieldMax, said higher interest rates are understandably weighing on gold in the near term as investors recognize the utility of earning meaningful income from their capital.
“It’s not surprising gold is under pressure,” he said. “If interest rates get high enough, they may not model exactly whether they're getting a real rate of return or not, but it does end up having a negative impact on real assets.”
Khouw said investors do not necessarily need to calculate precise inflation-adjusted returns to see the appeal of higher-yielding assets. He explained that when money-market accounts and other relatively liquid investments are paying around 5%, that income becomes meaningful, particularly for investors with cash-flow requirements.
“There is utility once interest rates become real,” he said. “There's a natural substitution effect whether people are doing the math or not.”
But Khouw argued that this competition does not eliminate the fundamental reason investors hold gold.
He said investors buy precious metals because they recognize that fiat currencies steadily lose purchasing power over time. Inflation, he added, effectively acts as a tax on savings, creating demand for real assets capable of preserving wealth.
“Investors buy gold because they know that…the dollar, any fiat currency, is not a store of value, and that it's being steadily diluted,” he said. “They understand it implicitly, that they are losing real purchasing power through time, and they want some kind of a hedge in the form of real assets.”
Khouw said the recent rise in interest rates is also correcting an imbalance that developed when policymakers were slow to respond to persistent inflation. In his view, inflation had already demonstrated its staying power years ago, even as policymakers continued to characterize the surge in prices as temporary.
He said the underlying price growth environment has shifted, with inflation settling at a higher structural level than markets had previously expected.
“We had plenty of evidence that inflation was real five years ago, that it was persistent four years ago when they were claiming it was temporary,” he said, adding that the new inflation regime was unlikely to return below 2% and instead would remain above 3%.
“Now they're starting to [reflect that], and so gold has come down. But the fundamental underlying problem remains unchanged.”
Although higher bond yields reflect the persistent inflation fears in the market, Khouw also argued that elevated interest rates on Treasuries is connected to deeper fiscal problems. He said monetary policy is largely responding to inflationary pressures rather than creating them, arguing that the more fundamental problem lies with government spending and fiscal policy.
He said a dramatic improvement in the U.S. fiscal position would quickly change the outlook for both inflation and interest rates, but absent that adjustment, those underlying pressures are unlikely to disappear.
At the same time, Khouw said gold's recent correction and normalization in volatility could eventually make the market more attractive to longer-term investors. Gold has historically not behaved like a highly volatile speculative asset, and calmer price action could encourage “stickier money” to return to the sector.
Khouw said YieldMax-related portfolios continue to maintain exposure to precious metals and mining equities, viewing the sector as an important source of diversification.
Despite higher rates and gold's recent weakness, he said he sees little reason to believe the metal's long-term role has fundamentally changed.
“It has been, and will remain, a solid non-correlated asset,” he said, describing gold as a means of preserving value over time. “I don't see any reason to think that that has diminished in any way.”
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