Erik Norland of CME Group wrote that monetary and fiscal policies will determine whether metals have bottomed and yields have peaked. Norland, Managing Director and Chief Economist at CME Group, noted in a recent analysis that investors attempting to discern whether gold and silver prices have set their cyclical lows, and whether bond yields have seen their medium-term highs, should look to monetary policy in the near term while watching fiscal policies over the longer term. He wrote that 2026 began with divergent narratives around inflation: precious metals soared through late January as investors braced for higher inflation and central bank independence concerns, while U.S. Treasury yields declined in 2025 and into February 2026. The disconnect ended in late January as convergence of sentiment over sticky inflation led to a sharp decline in precious metals while U.S. Treasury yields began rising, especially at the shorter end of the yield curve.
Precious Metals Decline Follows Shift in Federal Reserve Leadership and Rate Expectations
Norland wrote that the run-up in precious metals prices appeared to have been based on three market narratives: central bank independence might be eroding, central banks cutting rates in 2024 and 2025 despite above-target inflation in most countries, and expansionary fiscal policy and large budget deficits in the U.S. and elsewhere. He said that in late January, the news of Kevin Warsh's nomination to head the Federal Reserve seemed to raise concerns that the Fed was at risk of losing its independence. Norland noted that in 2011, Warsh resigned from the Federal Open Market Committee and began voicing his opposition to Quantitative Easing and holding rates near zero for extended periods. In chairing his inaugural FOMC meeting in mid-June, Warsh's Fed officially removed its easing bias.
Norland noted that over the past five months, precious metals prices have declined sharply while remaining well above early 2025 levels, which suggests that while inflation concerns have eased, they remain present. He wrote that over the past few months, investors in Fed funds futures and SOFR futures have gone from pricing 50 basis points of rate cuts over the next two years to 50 basis points of rate hikes. Norland said gold prices usually move inversely with rate expectations, rising in 2019 to mid-2020, and 2023 to early 2026 when rate expectations fell, and trading sideways when sentiment shifted to higher rates.
Core Inflation Rise Pushes Rate Expectations Higher Across Multiple Central Banks
Norland said that rising core inflation paradoxically contributed to pulling precious metals prices lower. He wrote that while precious metals are traditionally viewed as inflation hedges, accelerating inflation is sometimes unwelcome news because it tends to push up short-term interest rate expectations. Norland noted that rising rate expectations in the U.S. correlated with rising core inflation, with core PCE rising from 2.8% YoY to 3.3% over the past few months.
While the Federal Reserve has abandoned its easing bias and Fed fund futures have priced in rate hikes, Norland noted that other central banks have already raised rates. He wrote that thus far in 2026, the Bank of Japan, the European Central Bank, the Reserve Bank of Australia and Norges Bank of Norway have raised rates. Norland said the forward yield curves in many other nations are signaling the possibility of higher rates, with the main driver appearing to be that core inflation has been persistently running above target for years in the majority of these countries.
Budget Deficits Remain Elevated Despite Central Bank Tightening
Norland pointed out that even as central banks are beginning to tighten monetary policy, fiscal policy remains extremely loose. He said that up until 2017, the U.S. budget deficit averaged about two percentage points less than the unemployment rate as a share of the economy. Norland wrote that since 2017, however, this structural dynamic has flipped: the deficit has transitioned from being roughly unemployment minus two percentage points to unemployment plus two percentage points. He noted that despite a relatively low unemployment rate of 4.3% currently, the U.S. is running a budget deficit of between 5% to 6% of GDP.
Norland noted that the United States is by no means alone in this degree of deficit spending. He wrote that nations as diverse as Brazil, China, France, Germany, Japan, and the U.K. are also running large fiscal deficits. In Brazil and China, deficits are at 7.7% and 8.2% of GDP, respectively, surpassing the 5.8% for the U.S. as projected by the Congressional Budget Office in the current fiscal year ending September 30. Norland said France and the U.K. have deficits of 4.9% and 3.9% of GDP, respectively. He noted that deficits are currently smaller in Germany and Japan (3.8% and 2.0% of GDP, respectively), but both nations plan to ramp up public spending later this decade on infrastructure and defense. Norland wrote that Japan's public debt is close to 200% of GDP, roughly double that of its major peers.
Norland said that while budget deficits do not drive the day-to-day performance of precious metals and bond markets, they are very impactful from year to year. He wrote that the persistence of these structurally large deficits risks producing two outcomes: a massive volume of debt issuance that could drive sovereign bond yields significantly higher, or structural concerns over the long-term sustainability of public finances could drive investors into precious metals.
Bond Yields Rise Sharply in Japan and Europe While U.S. Treasuries Lag
Norland noted that U.S. bond yields have not risen significantly in response to these concerns, but sovereign yields have spiked elsewhere. He said that Japanese government bond yields have been soaring, and bond yields in France, Germany, the U.K., Australia and Canada have also been rising sharply, especially for longer maturities.
Norland pointed out that U.S. Treasury yields have not been rising as much as their foreign peers so far in recent months as the U.S. Treasury has increased its issuance of T-Bills while the Federal Reserve has curtailed its quantitative tightening, reducing the amount of long-term debt coming into the market. He warned that while favoring T-bills over long-term bonds suppresses long-term yields in the short term, an increased supply of T-bills heightens the concentration of highly liquid assets of the private sector. Norland wrote that because these instruments function quite similarly as cash, this supply shift could act as a backdoor means of monetary easing.
Norland Questions Whether Precious Metals and Bonds Have Hit Cyclical Limits
Looking ahead, Norland questioned whether precious metals and bonds had hit their cyclical limits. He asked whether precious metals are at bargain prices after their recent decline or will continue to sell off, and whether bond yields will continue to rise or are near a cyclical top. Norland wrote that in the short-to-intermediate term, any increase in central bank rates is likely to push short-term rates higher and precious metals prices lower. He said that as such, any continued rise in core inflation might be bad news for investors in bonds and precious metals.
Over the longer term, Norland said budget deficits could be the deciding factor in the direction of precious metals prices and bond yields. He wrote that any coordinated political effort to rein in deficits could lower long-term yields and reduce the structural lure of precious metals. Norland said conversely, the persistence or further expansion of these deficits could likely push long-term yields higher. He noted that at present, there appears to be very little political impetus anywhere in the world to implement tighter fiscal policy.
Finally, Norland said the equity market remains a wild card. He wrote that so long as equities continue to go higher, economic growth is likely to be sustained, increasing the likelihood of resource shortages that keep core inflation rates above central bank targets. Norland said that consequently, a prolonged equity bull market may remain fundamentally bearish for both government bonds and precious metals. He wrote that if stocks suffer a severe correction, economic growth could slow sharply, which could oblige central banks to reverse course and lower rates, potentially setting the stage for a renewed bull market in precious metals.
FAQ
What did Erik Norland of CME Group say about precious metals and bond yields?
Erik Norland, Managing Director and Chief Economist at CME Group, wrote in a recent analysis that investors attempting to discern whether gold and silver prices have set their cyclical lows, and whether bond yields have seen their medium-term highs, should look to monetary policy in the near term while watching fiscal policies over the longer term. He noted that 2026 began with divergent narratives around inflation, with precious metals soaring through late January while U.S. Treasury yields declined, before the disconnect ended in late January as sentiment converged over sticky inflation.
Which central banks raised rates in 2026 according to Norland's analysis?
Norland wrote that thus far in 2026, the Bank of Japan, the European Central Bank, the Reserve Bank of Australia and Norges Bank of Norway have raised rates. He noted that the forward yield curves in many other nations are signaling the possibility of higher rates, with the main driver appearing to be that core inflation has been persistently running above target for years in the majority of these countries.
What budget deficit figures did Norland cite for major economies?
Norland wrote that despite a relatively low unemployment rate of 4.3% currently, the U.S. is running a budget deficit of between 5% to 6% of GDP. He noted that Brazil and China have deficits at 7.7% and 8.2% of GDP respectively, surpassing the 5.8% for the U.S. as projected by the Congressional Budget Office in the current fiscal year ending September 30. France and the U.K. have deficits of 4.9% and 3.9% of GDP respectively, while Germany and Japan have deficits of 3.8% and 2.0% of GDP respectively.
