The Finalized Trinity of Models for Gold/Silver Bullion Portfolio (Part 2)

Model No. 2 Real Yields 

General introduction to the 3 models: These three consecutive posts (after a long absence) is the culmination of many months of hard work resulting in a suite of 3 models for the monitoring, forecasting and risk/reward calculation of my Gold and Silver bullion portfolio. Why do we need three models? 

Because Gold and Silver are monetary metals that carry no yield (interest-earning capacity) but are also hedges against inflation, currency debasement and geopolitical uncertainty. Additionally, Silver is an industrial metal that is required for nearly all products of the modern economy- from EV batteries to, semiconductors, solar panels, smart weapons, and indeed anything that requires electrical conductivity. Thus, we need to monitor not only the USD which is the currency that Gold and Silver are quoted in, but also bond yields, inflation and major currencies such as USD/EUR and USD/JPY. Also, Model No.1 uses only price data and is based on momentum , autoregression and other technical indicators. This is not to say that its an inferior model. In fact it is the best-performing model. But we need the fundamentals-based input variables of  Model No.2 and Model No. 3 to complement Model No.1.

This trinity of models is my last hurrah,and my legacy (turning 80 next year). It's something I have always wanted to do but could not-until recent develpments in AI and computing power made all this possible. 

How do interest rate changes have an impact on Gold and Silver?

Interest rates have the highest impact on gold and silver. As a proxy for inflation, high interest rates have a negative impact on gold and silver-because gold and silver are not interest-yielding assets. But high interest rates are also inflationary, and inflation brings with it debasement of hard currencies. Then gold and silver act act as hedges against currency debasement. What we need to look out for is the real yield-not the nominal interest rate, but the nominal interest rate minus the rate of inflation. For this, we have the Fed's TIPS - Treasury Inflation Protected Security. So Model No.2 monitors real yields. Examples below are taken for Model No. 2 run on 040726.

How to read the charts below

Left column (10-Year TIPS, red line): The primary long-run driver of gold and silver

prices. Use this for strategic decisions about your overall selling pace. Right column

(5-Year TIPS, amber line): A leading indicator, the 5-Year yield typically turns before

the 10-Year when the Federal Reserve signals a policy shift. A 5-Year reversal into

green territory while the 10-Year remains red is the early-warning signal to slow

discretionary selling. Green fills in the lower ROC panels = tailwind for metals

(falling yields). Red fills = headwind (rising yields). Both series are TIPS-based,

meaning they are direct market-implied real yields, not approximations. Hint: Monitor the increase/decrease in the Green area on a weekly basis. 

10 year Real Yields Rate of Change

5-year real yields rate of change