The yield on the 10-year U.S. Treasury note has risen more than 50 basis points so far in 2018:
While this is a significant move higher in yields, it could just be the beginning of a much larger move to the upside in yields.
Turning to a much longer term chart of the U.S. 10-year yield, we can see a head & shoulders bottom pattern which points to a rise above 4.00% in the 10-year note yield over the next few months:
10-Year Note Yield (2007-2018)
It is this surge in bond yields, fueled by rising inflation expectations which could turbo-charge precious metals, creating a very similar scenario to 1978-1980.
Inflation indicators have begun to turn sharply to the upside:
During the late 70s gold moved steadily higher before turning parabolic in late-1979, surging from roughly $400/oz to more than $800/oz in less than two months:
If the analog proves to be similar we would now be in early 1978, just before gold broke-out above $200 (in 1978 dollars). By some inflation calculations $200 in 1978 might be pretty close to $1400 today (you just need to assume an annual rate of inflation of 5%):
Gold (Weekly - 2008-2018)
$1650 might turn out to be a conservative upside target for gold if things play out at all like the 1978-1980 scenario, which saw gold more than quadruple within less than two years.
While I do not rely on analogs for actual market decisions, the breakout in yields is notable and a rising inflation/yields environment is something which investors should be considering seriously. While the overall macro-market backdrop is much different than 1978, the similarities are significant enough that investors should consider increasing their portfolio allocations to precious metals (I only focused on gold in this article for simplicity, however, silver is at least as attractive as gold right now).
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