Global bond yields rising

EU defence spending plans are driving German, French, and Italian bond yields higher. Japan’s are soaring too. The dollar is sinking: what does it all mean for gold and silver?

This week, the end-February decline in gold and silver prices appear to be over, with a recovery based on a firm undertone. In early European trading this morning, gold was $2,920, up $60 from last Friday’s close, and silver $32.60, up $1.50.

Despite the recent transfers of physical gold into New York, there still appears to be a bear squeeze in place. Look at how Comex Open Interest has declined in the last few months as gold has continued to rise (upper chart):

Silver appears to have been behaving more normally until last week, when Open Interest fell significantly and the price less so. It points to a firm undertone, reflected in silver’s outperformance relative to gold in the last four trading sessions.

These are dollar prices. But the dollar weakened considerably this week against the euro and the yen, reflected in the next chart of the USD TWI.

The TWI has crashed back below its moving averages, indicating that a strong dollar is over for now, which is obviously supportive for gold and silver. But behind the dollar’s sudden weakness is euro and yen strength on the back of sharply rising bond yields in the two currencies, illustrated in the following two charts of the German 10-year bund, and the 10-year JGB.

Japanese bond yields are still too low for the inflation outlook. More concerning is the German bund, which is the marker for all the other Eurozone bonds, pushing up financing costs particularly for France, Spain, and Italy which make up the bulk of Eurozone economic activity.

Under the excuse of unexpected defence spending, Germany is raising its debt limit and increasing defence spending by a further €500bn. Additionally, Brussels is allocating a further €800bn to defence, between them inflating the amount of euro debt funding significantly at a time when inflationary pressures haven’t gone away. And all this when the ECB decided to cut rates by a further 0.25% to leave its key deposit facility at 2.5%. It could turn out to be yet another ECB error, when a eurozone debt trap suggests that rates should rise, not decline.

The concern has to be that with bond yields rising in euros and yen, strains are being imposed on the global banking system. In the last two years, US regional banks have learned not to fund long maturities out of short-term deposits. It is not clear that this message has been fully absorbed in the highly leveraged Eurozone and Japanese banking systems.

Additionally, there is increasing evidence of stalling economies, with the Atlanta Fed’s GDPNow model estimating a sharp contraction in GDP. This is next:

Just when you might expect US industry to have increasing confidence due to Trump’s trade protectionism, it is collapsing. Should this continue, all DOGE’s efforts to reduce the budget deficit will be overwhelmed by lower tax revenue and higher welfare costs. Worse still, a contracting GDP combined with rising government debt is the classic definition of an intensifying debt trap.

Putting all the evidence together, of rising government deficits in the US, Eurozone, and Japan at a time of declining private sector activity, markets are likely to wake up to rapidly increasing credit risk at the currency level. No wonder precious metals appear to be headed higher — possibly much higher — reflecting not so much an increase in their values, but currency debasement.