DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.

Rising bond yields are giving gold serious competition as investors once again earn substantial income from cash and fixed income assets. Yet persistent inflation continues to erode fiat currency purchasing power, leaving the core case for owning gold intact, according to Michael Khouw, chief strategist at YieldMax.

Gold remained under pressure at the start of the new trading week as the yield on U.S. 10 year bonds climbed to 5.32%, its highest level in nearly 20 years. Spot gold last traded at $4,134 an ounce, nearly unchanged on the day.

In an interview with Kitco News, Khouw said higher interest rates are weighing on gold in the near term. Investors can now recognize the practical benefit of generating meaningful income from capital that might otherwise be placed in real assets.

“It’s not surprising gold is under pressure,” he said. “If interest rates get high enough, they may not model exactly whether they're getting a real rate of return or not, but it does end up having a negative impact on real assets.”

Khouw said investors do not need to calculate precise inflation adjusted returns to appreciate the appeal of assets producing higher yields. When money market accounts and other relatively liquid investments pay around 5%, that income matters, especially to investors who have cash flow requirements.

“There is utility once interest rates become real,” he said. “There's a natural substitution effect whether people are doing the math or not.”

That competition, however, does not erase the fundamental reason investors own gold, according to Khouw. Precious metals remain attractive because investors recognize that fiat currencies steadily lose purchasing power, while inflation effectively imposes a tax on savings.

“Investors buy gold because they know that…the dollar, any fiat currency, is not a store of value, and that it's being steadily diluted,” he said. “They understand it implicitly, that they are losing real purchasing power through time, and they want some kind of a hedge in the form of real assets.”

Khouw said the rise in interest rates is also correcting an imbalance that formed when policymakers responded slowly to persistent inflation. He argued that evidence of durable inflation had emerged years earlier, even as policymakers continued describing the surge in prices as temporary.

“We had plenty of evidence that inflation was real five years ago, that it was persistent four years ago when they were claiming it was temporary,” he said. Khouw added that the new inflation regime was unlikely to return below 2% and instead would remain above 3%.

The underlying environment for price growth has shifted, Khouw said, with inflation settling at a higher structural level than markets had previously expected. That shift has helped push rates higher and contributed to the pressure confronting gold.

“Now they're starting to [reflect that], and so gold has come down. But the fundamental underlying problem remains unchanged.”

Khouw also tied elevated Treasury rates to deeper fiscal problems. He argued that monetary policy is largely responding to inflationary pressure rather than creating it, while government spending and fiscal policy represent the more fundamental problem.

A dramatic improvement in the U.S. fiscal position would quickly change the outlook for inflation and interest rates, Khouw said. Without such an adjustment, he sees little reason to expect those underlying pressures to disappear.

At the same time, gold’s recent correction and the normalization of volatility could eventually make the market more attractive to longer term investors. Gold has historically not behaved like a highly volatile speculative asset, and calmer trading could encourage what Khouw called “stickier money” to return.

Khouw said portfolios related to YieldMax continue to hold exposure to precious metals and mining equities. The firm views the sector as an important source of diversification despite higher interest rates and gold’s recent weakness.

“It has been, and will remain, a solid non-correlated asset,” he said, describing gold as a means of preserving value over time. “I don't see any reason to think that that has diminished in any way.”

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.