Gold and the 10-year US Treasury bonds are moving in the same direction. One of them must be wrong

Gold has overtaken the Euro as the world’s second central bank reserve asset and the BRICS continue to ‘de-dollarise’. Overseas demand for US Treasuries is being quietly replaced by increasing demand for gold. Gold is not rising in price - it is the Dollar’s purchasing power that continues to fall and an increasing amounts of the currency are required to purchase an ounce of the metal.

The UK’s Monetary Policy Committee has the sole objective of adjusting Base Rate to achieve an annual inflation rate of 2%. The US Federal Reserve has a three-goal mandate from Congress:

• Maximising Employment: The Fed aims to foster economic conditions that promote the highest possible level of employment. 
• Stable Prices: This objective involves controlling inflation to keep the purchasing power of money stable. The Federal Reserve's longer-run inflation objective is 2%. 
• Moderate Long-Term Interest Rates: The Fed works to keep long-term interest rates at levels that support economic growth and stability. 

The August UK Base Rate cut, was agreed by a slender 5:4 majority of the MPC, despite an inflation rate significantly above the 2% target. The August number was 3.8%. The Fed’s mandates currently appear mutually exclusive. US inflation at 2.7% although above target compares favourably with the UK, as does the unemployment number of 4.3% versus the UK’s 4.7%. However, downward revisions of US employment numbers over recent months have increased the likelihood of a September Fed Base Rate cut to a near certainty. 

Rising longer dated UK Gilt yields appear to have interpreted August’s quarter point drop as a surrender to above target inflation. The narrow majority in favour of the cut demonstrates the conflicting influences behind the decision. The narrative acknowledges that inflation will peak at 4% in September before falling ‘back to the 2% target after that’. No forecast of timing and no mention of confidence in this outcome. Despite relatively robust US GDP numbers, 10-year Treasuries have moved in the opposite direction, with yields falling back towards 4%. Gold and silver prices have taken the opposing view. Both cannot be right.

I repeat, the price of gold is not rising - it is the purchasing power of FIAT currencies that is falling. We measure returns from equities and bonds in FIAT currency terms, but if we had invested in the S&P 500 and reinvested our dividends from the end of gold’s backing for the Dollar in 1971, measured in gold, the return from the S&P has been zero. The total sum from the investment in US equities would today buy less gold than in 1971. Returns from monetary assets, cash and bonds, have lagged way behind, with 10-year Treasuries having generated negative real returns for the past 100 years. They will continue to do so.

The US dollar lost 75% of its purchasing power through the 1970s while the gold price rose by almost 2000%. It would be unsurprising in the light of the US debt spiral if this is repeated over the current decade. A yield of 4% from 10-year US$ Treasuries will provide no protection. Remember where Paul Volcker took rates last time the Fed faced a period of stagflation? In 1981 ‘The Volcker Shock’ took rates to 20%, unemployment rose and inflation fell and restored confidence in US economy, eventually contributing to a decline in the price of gold. What odds will you give me on the Fed and the MPC raising rates to 20% to restore confidence in the US and UK economies - and currencies?

Jo Welman had a career in the City spanning 45 years and worked in a wide variety of financial sectors. After graduating from Exeter University in 1979 with a degree in economics, Jo spent ten years at Baring Asset Management where he managed a range of UK and US pension funds and unit trusts, investing across multiple sectors including bonds, international equities, commercial and residential property and private equity.

In 1989 Jo became Managing Director of merchant bank Rea Brothers’ institutional and private wealth investment management division. Over the following decade Jo launched a series of specialist investment trusts and funds in a variety of industry and property sectors, before forming a joint venture with reinsurance broker Benfields (now Aon Benfield) and raising one of the first limited liability corporate capital vehicles for the Lloyds insurance market in 1993. As part of his long-standing involvement in the insurance industry, Jo co-founded the Benfield Re-Insurance Investment Trust plc (Brit) in 1995. Following the sale of Rea to Close Brothers in 1999 Jo became Chairman of Brit Insurance Holdings Plc and in 2001, in partnership with Brit and Benfields, he co- founded specialist asset management firm, EPIC Investment Partners (EPIC).

Jo continues to chair an insurance company’s asset allocation and capital management process and provides corporate finance and investment advice to entrepreneurs and private investors. He sits on the board as a non- executive director of ARK Syndicate Underwriting and was appointed Chairman of the Walker Crips Group, the publicly listed fund manager, in April 2025.

“Feet up by the pool”

Jo does not receive any remuneration for his EPIC commentary. Instead, EPIC is pleased to promote the latest edition of his book “Feet up by the pool”.

Profits from sales of the book go to The Money Charity, a charity that shares Jo’s objective to help fill in some of the worrying gaps in the school curriculum. These omissions leave many young adults lacking in the financial awareness that they need to survive in a world where they will rely on their own savings if they are ever to stop working. Even if they earn the right to a full State Pension, today this amount hardly covers council tax and utility bills, and so they need to save and build up a sum of capital amounting to around twenty times their desired retirement income. A frightening number.

As Jo eloquently says, “If we can do our bit to raise awareness of the impending UK saving and pensions crisis, the exercise will have been worthwhile.”