BOND YIELDS AND GOLD / MACLEOD FINANCE

Bond yields and gold

Higher bond yields are undermining gold and silver. We examine why, and what are the consequences.

Alasdair Macleod

Brien Lundin (@Brien_Lundin) posted this chart on X, which explains much about why gold, and also silver, have weakened recently. 

In recent months, the negative correlation with US Treasury yields has been very close.

This prompts the question as to why this should be so. 

Obviously, it reflects changes in the spread between gold’s lease rate and rising bond yields. 

This is a legacy of the last four decades, when the propaganda struggle to establish the dollar as money replacing gold gradually succeeded.

At least, this was the belief that gradually held sway. 

If the gold standard was no more than a barbarous relic and gold was little more than a pet rock, of course the dollar was king. 

Never mind that the dollar was a fiat currency, an imaginary money created by the US government’s central bank.

So long as participants in financial markets believe this tosh, then clearly a rise in dollar interest rates will act to make non-yielding gold less valuable. 

In other words, we can see why it is that when rates rise, gold weakens. 

But it is an effect always constrained to a period of perceived currency stability in domestic markets. 

Not only do US markets default to this error, but markets in thrall to the dollar, such as London and elsewhere fall for it as well.

A large part of it stems from the financialisation of economies stemming from London’s Big-Bang in the mid-eighties, when gold was used as the basis of a carry trade investing in US T-bills. 

Gold was sold for T-bills, fixing interest rate differentials as drivers of price in collective minds.

The relationship between gold and the dollar of the 1970s and instances of heightened inflation and bond yields were quickly forgotten. 

At the beginning of that decade, the Fed’s funds rate was 3.7% and gold $35. 

In 1981, the fund’s rate was 19% and gold hit $850. In other words, there was a positive correlation between the two.

Why the difference?

Clearly, a negative correlation between dollar rates and the dollar gold price can only exist when in general terms inflation is not seen to be a significant concern. 

It can be expected to rise and fall under the general control of the monetary authorities: at least in the sense that it won’t run away. 

This tells us that while the inflation outlook is changing for the worse, financial markets in the West take the collective view that it will be just a temporary blip.

Lundin’s chart only tracks the relationship since late-March and shows a closely negative relationship between the 10-year Treasury note and the gold price. 

The same chart from the beginning of January tells a different story.

There were times when the negative correlation occurred, but gold still managed a substantial rise between April 2025 and late-February when the net change in the bond yield was about 10 basis points. 

It appears that the negative correlation has been only good in parts.

Context is everything. 

Until the US decided to wage war on Iran, investors expected interest rates to decline in 2026, hopes reflected in bond yields declining over most of 2025. 

But inflation remained above the Fed’s target, and central banks were buying gold, not impressed by relative yield arguments.

We now face a different environment, for which markets have yet to adjust. 

There is little doubt that instead of interest rate cuts in 2026, we should now expect them to rise. 

This is beginning to be reflected in higher bond yields, but the full implications are not yet reflected in gold. 

Higher inflation is in fact a loss of currency purchasing power. 

The calculation becomes one of assessing that loss potential against the bond yield which compensates for that risk. 

At 4.6% on the 10-year maturity, is the compensation for loss of the dollar’s purchasing power sufficient?

We can all have our opinions, but the indications are growing that it is not sufficient and that we will see higher bond yields. 

If the assumption is that the higher yields will not destabilise government finances, then doubtless gold will be sold or marked down accordingly. 

But if there is a likelihood of significantly higher inflation, a slump, or government funding facing a debt trap, then the risk will be in the bond, not in gold which emerges as a safe haven.

It is often the case in a currency decline that foreigners take a different view from domestic users. 

It is clear from all commentary that domestic users of the dollar see minimal danger to the value of their currency. 

They are just beginning to suspect that interest declines are now on hold and that increases are a remote but increasing possibility. 

The same can be said for domestic users of yen, euros, and sterling.

Foreign insiders appear to take the opposite view. 

While domestic users of G7 currencies are yet to be alarmed and are sellers of gold and silver, they are being bought by foreign central banks and sovereign wealth funds, as well as investing institutions and citizens who are selling down their holdings of these currencies. 

While America sells, China and others buy, until there’s none left.

In March alone, China and India imported 561 tonnes of silver through London, which in turn imported 601 tonnes from the US, while the price fell from over $90 to under $70.

The risk they see should not be ignored. 

They see the end of the dollar-based fiat currency system.

That will happen anyway as the imagination that currencies are money faces reality — as always happens eventually.

The hit to the dollar’s purchasing power from the war against Iran and the closure of the Strait of Hormuz is turbocharging its decline, bringing forward its extinction. 

That’s what the Asian hegemons see as clear as daylight but is yet to become apparent to the inward-looking American investment community.