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| By Gavin Magor |
Gold is supposed to shine when the world gets scary.
Right now, the world is plenty scary.
Over the weekend, President Trump rejected Iran's latest proposal to reopen the Strait of Hormuz and end the war.
Oil jumped. Stocks fell.
And precious metals?
Gold and silver both broke below important support levels Monday as the 10-year Treasury yield surged to a fresh 20-year high above 5.2%.
Along the way, it touched its lowest level since early August.
That leaves gold roughly 26% below the record $5,594.82 it set on Jan. 29.
If you bought gold as insurance against exactly this kind of crisis, the early part of this week probably feels like your insurer just raised your premium.
Gold fell to $4,136, a seven-week low, over the weekend. As of this writing, it's trading near $4,185.
Silver fared worse, falling about 5% to around $61 an ounce. It continues to trade in the red today.
The U.S.-Iran War isn't helping gold.
Why? The answer is interest rates.
Higher oil prices mean higher inflation.
Higher inflation means the Federal Open Market Committee is more likely to keep raising rates.
The Fed already raised its benchmark rate by a quarter-point on Sept. 16.
Related story: These 3 Forces Will Fuel Gold’s New Bull Run
Traders now put the odds of another hike at the October 27-28 meeting at about 72%, according to CME Group's FedWatch tool.
Cleveland Fed President Beth Hammack added fuel on Friday, warning that the Fed cannot let persistent inflation condition people to accept higher prices as normal.
The bond market heard all of that.
The 10-year Treasury yield touched 5.28% this morning, the highest since 2007.
And that is gold's real problem.
Gold pays no interest.
Every dollar sitting in gold is a dollar not earning 5% in a Treasury.
Analysts call that the cost of carry.
When yields were low, it was easy to ignore.
Above 5.2%, it isn't.
What This Means for Your Money
Put $10,000 in gold and it pays you nothing while you wait.
The same $10,000 in a 10-year Treasury pays about $524 a year at today's yield.
Even 10-year Treasury Inflation-Protected Securities (TIPS) now yield 2.88% on top of their inflation adjustment.
That's a tough offer for gold to compete with.
Whilst gold can still rally on a scary headline, it now has to beat a guaranteed return to hold investors' attention.
If you own physical coins or bars, remember you paid a markup over the spot price.
So, your own breakeven sits higher than the price you see quoted.
None of this means selling in a panic. Gold is still about 8% higher than it was a year ago.
It does mean treating gold as insurance, not as your growth engine.
The Gold Miners: Two Different Stories
Miners give you gold exposure plus an operating business and a dividend.
They also tend to move more than the metal itself, in both directions.
Let’s look at two gold miners that proved this as gold fell and started to climb back up today.
Agnico Eagle (AEM) earns a Weiss stock rating of B-, a BUY.
It focuses on politically stable jurisdictions, with mines in Canada, Australia, Finland and Mexico.
It closed Friday at $194.48 and now sits about 27% below its 52-week high of $255.24.
Newmont (NEM) carries a Weiss rating of C+, a HOLD.
The world's largest gold miner still shows a year-to-date total return of more than 15% on the Weiss Ratings website.
But it now sits about 14% below its 52-week high of $135.29, set on August 25.
Newmont reports third-quarter results on Oct. 22, and Agnico Eagle follows on Oct. 28.
Those reports will show how much of the record gold price earlier this year is still flowing through to profits.
Key Items We're Watching
- Wednesday's Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge.
- Friday's September jobs report, where early consensus calls for about 85,000 new jobs.
- Any progress in U.S.-Iran talks, which President Trump says he expects to resume this week.
- Whether the 10-year Treasury yield holds above 5.2%, which would keep the pressure on gold.
Bottom Line
Gold still shines when the world gets scary.
It just shines less brightly when a Treasury pays more than 5% for sitting still.
For my part, I'd keep gold as a modest insurance slice of a portfolio whilst letting a higher-Weiss-rated name like Agnico Eagle carry the sector exposure.
Cheers!
Gavin
P.S. How did I know Agnico Eagle was the stronger gold-mining play? I started with the Weiss ratings.
With Weiss Ratings Plus, you can do the same — using our Stock Ratings Analyst to uncover the highest-rated stocks in gold, mining or just about any other corner of the market.
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