Gold Surprisingly Resilient Despite Surging Dollar and Yields

The U.S. dollar and Treasury yields have recently surged at a rapid pace, a scenario that typically sends gold prices tumbling. Yet, gold's resilience signals an impressive underlying strength.

This resilience underscores gold's high relative strength. 

The surge in the dollar and Treasury yields has been driven by rapidly rising inflation expectations—particularly following President-elect Donald Trump’s victory in November—as well as growing concerns about the U.S. fiscal situation.

Since early October, the U.S. Dollar Index—a key measure of the U.S. dollar’s strength relative to other global currencies—has staged an unexpected rally, climbing roughly 10%. 

While a move of this magnitude might be common for a stock, it is exceptionally sharp by currency market standards. 

It's important to note that this strengthening refers specifically to the U.S. dollar’s exchange rate against other currencies, not its purchasing power—a distinction that often confuses people.

Much like the U.S. Dollar Index, U.S. Treasury yields have surged since October, fueled by rising inflation expectations following Trump’s election victory, largely due to his proposed economic policies—particularly tariffs—which are expected to be inflationary. 

In addition, 'bond vigilantes' are demanding higher returns to compensate for the growing fiscal concerns associated with U.S. Treasuries.

Historically, a strong dollar is unfavorable for gold, as gold—and commodities in general—tends to trade inversely with the dollar. Likewise, rising interest rates or bond yields usually put pressure on gold because it doesn’t generate any yield, prompting many investors to shift funds away from gold and into higher-yielding assets. 

However, what’s particularly striking is how gold has maintained its ground over the past few months, despite the surging dollar and rising interest rates. 

This resilience highlights its high relative strength, suggesting that another surge may be on the horizon, especially if the dollar and rates finally pull back.

Over the past month, I’ve been highlighting the formation of a triangle pattern in gold, which suggests a bullish breakout is on the horizon. Such a move, if confirmed, should propel gold to $3,000 and beyond in a relatively short time.

The previous chart showed gold priced in U.S. dollars, where the dollar's strength has made gold appear weaker than it truly is. 

However, when priced in other currencies, such as the euro, gold's actual strength becomes evident—recently reaching an all-time high in euro terms.

In the past, gold was far more sensitive to rising U.S. interest rates, but this dynamic has shifted in recent years. 

The prevailing explanation attributes this to President Biden's sanctions on Russia following its invasion of Ukraine. The seizure of $300 billion in Russian reserve assets reportedly alarmed many central banks, leading them to reduce their exposure to the Treasury market and diversify in favor of gold.

In addition to the prevailing theory explaining the decoupling of gold and U.S. interest rates, I propose that China’s plunging interest rates—driven by its worsening deflationary crisis, which has erased $18 trillion in household wealth—may also be contributing to this breakdown in their historical relationship. 

Since gold doesn’t generate yield, the opportunity cost for investors in countries with low interest rates (such as China in recent years) is significantly reduced, making gold more attractive.

Notably, much of gold’s bull market over the past year has been fueled by Chinese investors in both the futures and physical gold markets, while Western investors have remained largely on the sidelines.

With the U.S. national debt at a staggering $36.17 trillion and increasing by roughly $1 trillion every 100 days, fiscal concerns have become a significant factor driving the spike in Treasury yields.

Meanwhile, gold has remained resilient, benefiting as a safe-haven asset amid these fiscal worries, which explains why rising yields haven’t had the usual dampening effect on gold this time around.

As the chart below shows, the U.S. national debt has been rising not only in absolute terms but also as a percentage of GDP, highlighting an alarming increase in the country’s debt burden over the past several decades. 

This growing debt load significantly hampers the government’s ability to respond to a recession or other crises with fiscal stimulus, a troubling prospect given the increasing risk of an economic downturn. 

This precarious fiscal situation creates a very favorable environment for gold, which stands to benefit when the printing presses inevitably run on overdrive in a desperate attempt to keep the government and economy afloat.

To summarize, gold has demonstrated remarkable resilience in the face of a surging U.S. dollar and rising Treasury yields.

Historically, these factors would have caused a decline in gold prices, but in recent years, the dynamics have shifted. This change can be attributed to the worsening U.S. fiscal situation, international central banks diversifying away from U.S. Treasuries into gold, and, as I’ve theorized, China’s plunging interest rates amid its deflationary crisis—akin to "China’s 2008." 

Gold's impressive strength suggests that the bull market has much further to run, particularly if the dollar and Treasury yields experience a pullback soon.

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