Bonds and Gold React Differently to “Inflation” … or Do They?

As usual, the Pied Pipers of the Gold Bug Echo Chamber especially are, at best, fighting the last war; and have again failed to understand TODAY’S market dynamics.

COMMENTARY -- February 22, 2021

The morning of Wednesday, February 17, brought a minor (so far) jolt to markets the likes of which had not been seen in quite some time: a HUGE jump in U.S. producer price “inflation.” Expected to come in at a 0.4% rise month-over-month, the number instead was a whopping +1.3% rise in producer prices; in one month!

Granted, year-over-year numbers remain relatively tame. Yet it’s the recent trajectory that has a few more people on Wall Street taking notice: a host of base metals, energy and even agricultural commodities have all been on tears in the recent past. Increasingly, it’s being believed that broader consumer price inflation will soon be picking up notably on the heels of all this.

While such a move in a headline inflation number like this has had the expected outcome where the Treasury bond market is concerned—pushing yields to their highest close since before the Plannedemic—gold decidedly has not followed the script. In fact, the yellow metal closed the week just past hanging on for dear life to a hoped-for “double bottom” within that $1,750-$1,775 per ounce range I suggested months ago was the potential next destination; this, after advising my Members to sell our ETF and trading positions at last summer’s peak near $2,100/ounce.

What gives!?


That was the key phrase of a Bloomberg headline as gold struggled to get off the mat last week. Yet gold’s being a laggard given the runs of almost everything else in the recent past—not the least of which, all the industrial metals, “Green energy” plays, Bitcoin, etc.—is no mystery, as I have been discussing for some time. But it apparently is to some of the “usual suspects,” who once more have egg on their faces over their calls that gold was going to soar post-U.S. election thanks to 1. Biden’s victory, 2. The appointment of the hyper-Keynesian Establishment retread Janet Yellen as Treasury Secretary, 3. The Democrat Party’s takeover of the Senate and 4. The likely prospects of a few gazillion dollars’ worth of MORE “stimulus” of one kind or another; all of which was supposed to send gold soaring with these other things.

As I have said countless times, though, folks who have been too trusting of the yarns and sales pitches (as opposed to sound, informed market advice) of too many gold gurus need to remember a fact of life of the markets todayand that is, gold’s fate is NOT determined by what “Gold bugs” think, but what the 99%+ of other investors think. And for the time being, all those other generalist investors/NON-Gold bugs have a lot more to occupy their time and money with that is working.


“Inflation is always and everywhere a monetary phenomenon, in the sense that it  cannot occur without a more rapid increase in the quantity of money than in output.”

          -- Milton Friedman (and others)

It’s been some 40 years since the last major surge of consumer price inflation in the U.S. peaked with the likewise double-digit high interest rates that the 1980’s began with. Since that time, each notable rebound in consumer prices within what has been a 40-year trend now of generally declining price measures has been accompanied—as now—with dire warnings that this time our fate really will be “hyperinflation.” Maybe we dodged the bullet in the late 70’s – early 80’s and didn’t quite get to the Weimar Germany-like “wheelbarrow stage”. . .but it’s coming! And you’d better own gold!

Yet with each fleeting move back toward broader and sustained consumer price inflation, those episodes petered out almost as quickly. I won’t take the time and space here to go into it all; but I addressed this in some considerable detail (along with several other subjects and investment themes) on the day of that big PPI jump with my buddy Trevor Hall at Mining Stock Daily.

As I explained (and will be further in MUCH more detail in the coming few weeks), the BIGGEST thing that has all the Gold bugs and others wrong-footed yet again is their failure to understand “The Flation Debate” as it IS in the Year 2021.  I URGE you to listen to the recording at

And on this subject, your “homework” is also to go back to a discussion I had with Palisade Gold Radio’s Tom Bodrovics on this same subject; it can be listened to at

 The takeaway/main point is this: Those who are again looking for “inflation” to bubble up continue to fight this war as if it is the 1970’s. As I explained in both of those above interviews, since that “Second Act” of Paul Volcker’s Chairmanship of the Fed beginning in 1982-1983 turned all these equations on their heads, “inflation” has by design come about in the form of rising asset prices. That is where the HUGE surge in credit . . .DEBT levels. . .(i.e.—new “money”) has gone.

As with the additional, big Plannedemic-related surge in the size of the Fed’s balance sheet, asset classes of all kinds have been goosed in the hopes that said “wealth effect” will trickle down to the hoi polloi and allow most to at least service the gargantuan debt loads. But as we have all seen in recent years—and as I discussed especially with Trevor Hall—there are limits to what the economy can bear as a matter of simple mathematics in the form of higher consumer prices especially, before demand is hit and prices at the source/wholesale level must soften anew.

This is not to say that the moves in a number of commodities are NOT the real thing; and some of them continue to have room to run. But investors will need to be careful to not get too caught up that they cannot see the bigger deflationary dangers that still lurk out there; and which could with rapidity take copper, oil, and darn near everything down sharply for a while. Because—AGAIN—we have already had a huge surge of inflation in the markets; and the speculation, froth and financial imbalances engendered once again by the Fed in all this could, with little or no warning, cause a deflationary blow off.

So I agree with an assessment of a few days ago offered by Mohamed El-Erian who, likewise, suggested that shortages of many commodities (fundamentally of all of them, uranium is the best story) could lead to further “pops” in some prices; but that the idea of all this leading to a broad, sustained period of overall rising consumer prices is unlikely (just like—as you see via the above chart—the dramatic but temporary surge in copper post-Crash over a decade ago did not lead to the kind of “inflation” many predicted then … nor will it do so now.)


None the less—together with the uptick in prices of many things of late—we have seen a reaction of some note in the Treasury market, even if gold is still a wallflower for the time being. As with other episodes in recent years where the long, secular bull market for Treasuries has been interrupted and it looks to some as if we will see a sustained move back toward much higher rates, this one, too, is especially closer to its end than its beginning.

As you see via the above chart, yields have moved back now to where they twice bottomed in big ways in years past. I do not believe they can move much above the 1.4% - 1.5% level on the 10-year Treasury yield without finally inflicting more damage on the stock market especially.

While some are looking at the bond market and surmising that the “bond market vigilantes” of old have come back from seeming extinction and are now going to relentlessly sell off Uncle Sam’s I.O.U.’s and drive rates higher, they shouldn’t get their hopes up (and if they correctly have shorted Treasuries of late, they’d better head for the exit.) The Fed will NOT allow such an uncontrolled move in the markets of longer-term yields higher that would dramatically undermine all the bubbles it’s re-blown.


More often than not over the last decade or so post-Financial Crisis, what I have called The Odd Couple Trade – being long both Treasuries and gold at the same time—has been a winner. And it will be again, in my view; perhaps soon.

Yes, Felix and Oscar are battered right now. But that won’t be lasting. And that is precisely because the narrative many are believing in of this return to a long, sustained period of price inflation is unlikely to occur; indeed, it mathematically pretty much can’t. (Again, you NEED TO LISTEN to the two above-linked discussions to get the details as to why.)

Inevitably, we will see the markets realize that—after this post-Plannedemic “bounce” of both economic activity and prices has played itself out—we will be back to where we were prior: a bloated, debt-choked economy that cannot grow sustainably no matter how much the Fed prints. And especially if we see that epiphany come suddenly and/or via some financial “accident” the rediscovery of Treasuries and gold will be dramatic.


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