Interest rates in the U.S. are at levels not seen in years and that could have massive ramifications across different financial markets, especially for gold, MKM Partners’ Michael Darda warned on Wednesday.
The benchmark 10-year Treasury note yield rose to its highest level since 2011 this week, while the two-year note yield trades at a level not seen in a decade. Investors have been selling Treasurys amid fears that rising inflation could lead the Federal Reserve to tighten monetary policy faster than the market is expecting.
“Rates on risk-free cash assets (government bills and notes) in the U.S. have now risen to a record high against equivalent rates on euro-area debt. If this leads to or is associated with a renewed/sustained rally in the dollar exchange rate, it will have important implications for global asset allocation,” Darda, the firm’s chief economist, said in a note to clients.
Rising rates have helped keep a lid on stock gains in 2018. For the year, the Dow Jones industrial average and S&P 500 are up only 0.3 percent and 2 percent, respectively. Last year, both indexes surged at least 19 percent.
Darda added gold could be in danger, as the higher rates could spark a bear market for the precious metal. “Although the relationship isn’t perfect, rising real rates … have been strongly inversely related to the level of gold prices over the last two decades.”
Gold prices have been under pressure this year, falling more than 1 percent in that time period. The precious metal also posted its biggest one-day decline since November 2016 on Tuesday, dropping to a level not seen since Dec. 28.
Gold futures for June delivery settled up 0.1 percent at $1,291.50 per ounce on Wednesday.