Economics Questions

Re: 10 yr. rate vs. gold?

Chris — Thu, 28 May 2009 06:13:33 GMT

Evan Stephen:

I'm not too clear about a basic concept here. My thinking must have a hitch in it. I thought interest rates on any bond, including treasuries like the 10 yr. note, move in opposite directions of the price. If not enough people are offering to buy a bond, then the issuer, (government in this case) has to offer a higher rate to entice investors to buy. It seems to me that this drop in price reflects a drop in the demand for the 10 yr. note. I would have expected that money, which would otherwise be flowing into the T-bill, would be diverted into gold, and gold stocks, and the dollar would weaken.
Along about 2:00 PM Eastern time today (Wednesday May/27), the rate on the 10 yr. note took a sudden upward spike, stocks dropped, and so did gold, and gold stocks. That is inconsistent with my limited understanding. Can someone shed some light on this for me please.

Things will not always move up and down either inversely or positively as "they should" according to theories; especially in the short-term, as pointed out by the first person replying to your post. For example, look at the DJIA shooting up after jobless claims kept soaring, but when they weren't as bad as expected. Same thing goes for individual companies, posting losses "not as bad" as analysts forecasted so now their stocks go up. It's completely idiotic, but it happens; at least in the short-term.

I understand your thinking regarding the interest rates on bonds, specifically the 10 years Treasuries. You are correct that prices and yields are inversely related with regards to bonds because if interest rates rise investors can purchase new debt securities at higher yields, thus forcing holders of existing bonds to sell them at a discounted price. This rise in interest rates on Treasuries probably does indicate the dollar will continue to weaken (well, we know it will but I mean the market will realize it). However, if this means that the demand for Treasuries and concomitantly U.S. dollars fall, it doesn't essentially mean that there is an increase in the demand for gold. Perhaps there was a greater demand for silver, maybe people decided to invest in foreign stocks not denominated in USD, etc. - who knows. People who I assume are too stupid to realize that the U.S. is going to destroy their currency believe that Treasuries are a "flight to safety" and they rightly realize that gold is a flight to safety as well. Hence both may have gone down at the same time because investors are more confident about other investments, at least at the moment you describe. Remember, as von Mises said, there are no constant relations in economics.

In liberty,

Chris

Re: 10 yr. rate vs. gold?

onebornfree — Thu, 28 May 2009 04:31:08 GMT

Evan Stephen:

I'm not too clear about a basic concept here. My thinking must have a hitch in it. I thought interest rates on any bond, including treasuries like the 10 yr. note, move in opposite directions of the price. If not enough people are offering to buy a bond, then the issuer, (government in this case) has to offer a higher rate to entice investors to buy. It seems to me that this drop in price reflects a drop in the demand for the 10 yr. note. I would have expected that money, which would otherwise be flowing into the T-bill, would be diverted into gold, and gold stocks, and the dollar would weaken.
Along about 2:00 PM Eastern time today (Wednesday May/27), the rate on the 10 yr. note took a sudden upward spike, stocks dropped, and so did gold, and gold stocks. That is inconsistent with my limited understanding. Can someone shed some light on this for me please.

Although in hindsight, over the long term, markets may appear to behave/move "rationally" in relation to some theory of how they "should" behave relative to each other, the reality is that in the short term there are all sorts of day to day inexplicable aberrations which contradict any theory, even the most generalized.

With all due respect, maybe you need to start expecting the unexpected short term, instead of trying to rationalize short term market movements according to some pet theory about how they must behave?

"Financial Safety Rule #1 says: despite many claims to the contrary, no one, not even your favorite economist or investment advisor, can reliably predict future economic events. Therefor, in order to broadly protect your savings from unforeseen and unforeseeable economic events/scenarios, you must take two very important steps......."

10 yr. rate vs. gold?

Evan Stephen — Thu, 28 May 2009 01:30:07 GMT

I'm not too clear about a basic concept here. My thinking must have a hitch in it. I thought interest rates on any bond, including treasuries like the 10 yr. note, move in opposite directions of the price. If not enough people are offering to buy a bond, then the issuer, (government in this case) has to offer a higher rate to entice investors to buy. It seems to me that this drop in price reflects a drop in the demand for the 10 yr. note. I would have expected that money, which would otherwise be flowing into the T-bill, would be diverted into gold, and gold stocks, and the dollar would weaken.
Along about 2:00 PM Eastern time today (Wednesday May/27), the rate on the 10 yr. note took a sudden upward spike, stocks dropped, and so did gold, and gold stocks. That is inconsistent with my limited understanding. Can someone shed some light on this for me please.