This week saw bond yields catapulting higher. What does it mean for gold, silver and the entire commodity complex?
“The fact of the matter is that the emerging crisis is unlike those which have come before. Since the Second World War, crises have always been in the private sector followed by governments riding to the rescue. This one is in governments themselves, and there is no one to rescue them.”
It is now clear that the US government has a funding problem. And it extends also to all the other G7 members, whose debt funding costs are all rising in unison. To put it into context, at current yields debt interest on US government bonds is the equivalent of half the USG’s current on-budget revenue. The only mitigations are that there is debt yet to mature with lower yields, and that about $8 trillion of the gross $40+ trillion is owed between government departments.
The US government is hostage to yet higher interest rates and bond yields, driven by a mixture of geopolitical factors and concerns over the inevitable slump in business activity together with soaring prices triggered by the crisis in the Middle East. The danger is that they are combining to set a debt trap for government finances, where higher rates beget yet higher rates. This is reflected in the long-term chart of the US long bond:
The yield is now in thermal runaway mode and can only be addressed by a Volcker-like policy of taking all the anticipation of higher bond yields out of financial and currency markets, with the Fed raising interest rates significantly above current levels. But that would collapse the economy, financial markets, and government finances so it can be ruled out.
The fact of the matter is that the emerging crisis is unlike those which have come before. Since the Second World War, crises may have been caused by government policies, but they have always been in the private sector followed by governments riding to the rescue. This one is in governments themselves, and there is no one to rescue them.
It is against this background that we must consider the position for currencies led by the US dollar. This week’s events in the bond market show beyond any reasonable doubt that governments are trapped into policies which can only destroy the purchasing powers of their currencies. The US Treasury is already leading the way by resorting to shorter term debt and monetising the longer-term. By this process, average maturities are shortening, and the yield curve flattening with 3-monthT-bills now yielding about 4.2%.
Unless something radical changes for the better, led by the dollar all G7 currencies are in a death spiral. Yet markets are frozen into inaction. The consequence for equities is likely to be catastrophic, bursting the credit-fuelled bubble. The consequences for the dollar/gold exchange rate should be equally clear, particularly since the western capital markets’ establishment possesses close to no gold. Goldman Sachs recently estimated that at Q2 2025 gold ETFs represented only 0.17% of private US portfolios, though as they say estimates may vary.
Even speculators are broadly out of this market, with open interest on Comex well below the long-term average of 480,000 contracts, though that has begun to normalise:
In light of current developments, this underrepresentation is potentially explosive. The shift out of bonds and equities into gold will be a life-defining event for investors. It is against this background that we note gold currently treading water, seeking a sense of direction though it appears to be finding a base.
Gold represents safety from increasing risk in credit markets. It also represents the broader commodity complex, not the one replicated in paper markets but physical possession with no counterparty risk. There will be little or no warning when led by government bonds financial markets collapse and gold soars.