The Contrarian Case for Gold as Yields Rise

Yesterday, markets were fine with the rate hike until Kevin Warsh started talking.

In a brief moment of jocularity, we were sitting next to a hedge fund manager in a Congressional hearing on AI at 2 p.m., when the Fed announcement came out. We both said simultaneously to one another, “wait until the press conference.” Sure enough, Warsh stepped to the mic and the selling began.

Officially, the Fed raised rates by a quarter point yesterday in a 12-0 unanimous vote, lifting the target range to 3.75%–4%. It was the first rate hike since July 2023.

The move had been priced into the market after Warsh’s Jackson Hole warning, but the press conference is when traders got twitchy trigger fingers. Stocks reversed lower, short-term yields rose, the dollar strengthened, and gold backed off its intraday highs as Warsh reminded investors that inflation remains above target and another hike is still on the table.

The S&P 500 and the Dow indices each dropped by ~1% by the close.

Markets are pricing in a 90% chance for another quarter-point hike:

Reuters later reported that 16 of 18 Fed policymakers see at least one more hike by the end of 2026.

That sounds bad for stocks. And maybe it is. But we’re confident the economy is strong enough to tolerate it for now. Even during the runup to the midterms.

Hear us out:

Consumer spending is holding up, the labor market is not cracking, and the feared AI job-loss wave has not yet shown up in the economic data. So investors may keep buying stocks, especially through another round of AI earnings, as long as growth still looks healthy.

The deeper issue is that the Fed can raise or cut short-term rates, but it cannot fix the federal debt problem.

With the Treasury’s daily debt dataset tracking total outstanding public debt, the Committee for a Responsible Federal Budget said gross debt is now at $40 trillion. Congress is too busy playing footsy with their respective parties to do anything constructive about deficit spending.

As we detailed on Tuesday, bonds have notched their way into contrarian territory. After years of poor returns and inflation damage, investors hate bonds. Bonds are still taking a beating.

As a result, at today’s higher yields, they are offering risk-averse savers income again.

Yesterday’s rate hike reveals that, despite his academic treatise during the confirmation hearings earlier this year, Kevin Warsh will chair the Fed as any other Fed chair would. To be quite frank, we were holding out for Mr. Warsh to shock with a rate cut until 2pm…

Oh well, gradual hikes will eventually spark emergency cuts when markets or the economy break. In a crisis, the Fed will not keep hiking by quarter-point increments. It’ll slash fast.

Our bond argument got so much less interesting as of yesterday: buy bonds when yields are high, sentiment is terrible, and the next crisis could force the Fed to slash rates. When rates fall, bond prices rise. Long-term bonds usually benefit the most because they are more sensitive to changes in interest rates.

Boring, same ol’, same ‘ol. The simple fact is, the Fed and Treasury are rendered ineffective by an absentee Congress. Deficit spending and rising debt service payments are the root cause of inflation.

Gold, however, is a different story.

Normally, higher interest rates should pressure gold. Gold does not pay interest. If Treasury bills and bonds pay higher yields, investors have a stronger reason to hold bonds rather than gold. A rate hike should be a headwind for gold.

That suggests something larger than one Fed hike is driving the market. Goldman Sachs Research recently told its analysts to expect gold to rise further, supported by central-bank buying.

Global central-bank demand, distrust of government debt, fiscal deficits, geopolitical stress, and the broader debasement trade are overpowering the textbook “higher rates are bad for gold” argument.

With gold starting to break higher in the second half of the year, it’s one area where we can remain bullish, even in a regime where interest rates are inching higher. Today’s Grey Swan Pro does just that, with an early stage gold developer about to open up a new mining operation – just in time for higher gold prices to benefit the bottom line.

~ Addison

P.S. This afternoon in Grey Swan Live!, we’re bringing back Ronan McMahon of Real Estate Trend Alert. We continue our exploration of global investing — outside the dollar — in all its facets.

Ronan is the leading frontier development opportunities in high-end overseas real estate – for lifestyle and income.

Join us for Ronan’s breakdown of where the prices are much better relative to the value than in most U.S. markets. Which deals are most attractive to U.S. investors trying to preserve their retirement capital and generate strong income.

Ronan’s business development strategy is his secret weapon. It’s worth joining us for Grey Swan Live! just to hear how the deals work in your favor.

We might be able to get him to sing an Irish ditty for entertainment, too!