The Contrarian Gold Play

Just when it seemed the price of gold was destined to lag in the face of a rebounding economy and rising interest rates comes news that few investors were anticipating.

Interest rates have suddenly retreated. The yield on the 10-year Treasury note dropped below 1.3 percent on July 8, down from 1.7 percent in mid-May as institutional investors unleashed a buying frenzy for bonds. (When bond prices rise yields drop.) It’s a significant move with important implications for gold because the precious metal tends to perform well when it doesn’t have to compete with high-yielding alternative investments.

As the Delta variant of the virus that causes COVID-19 spreads and vaccination rates slow the possibility of a stall in the nation’s economic recovery has emerged. Beyond the possibility of new lockdowns, many companies are reporting labor shortages; they’re having trouble filling open positions. At the same time, supply chain bottlenecks continue to constrain factory production. Semiconductor chips, copper, steel, lumber, and other essential commodities are in short supply relative to demand. As long as such hurdles remain for American companies and the overall economy, it’s likely the Federal Reserve will maintain its easy monetary policy and keep pumping money into the financial system.

All of this should be negative for the U.S. dollar and positive for gold. In fact, signs of a rebound for gold emerged in early July when the price for an ounce of gold bounced off the $1,770 level and climbed back above $1,800.