Transitioning from Bonds to Gold

Recently, there has been a huge bubble forming in what people “feel” is always a “safe” financial instrument: treasuries.

And much of the time they are right. However, any financial instrument can get ahead of itself and form a bubble as “everyone gets the same idea at the same time”. Well, that is what has happened in bonds as money got scared and ran for the hills.

click to enlarge images

Those hills ended up being U.S. Treasuries, the U.S. dollar and the Japanese yen. In the past, I’ve covered the inflows into these and where some of the outflows will go.

Now I want to talk about one more place that money will go when the bond bubble eventually busts. It will go into gold.

In the past I've talked about the money going into stocks and commodities in general once the bubble bursts but I want to get specific on gold for a moment.

I’ve been watching gold very closely recently because I’ve seen it “overcome some recent obstacles” that most financial instruments can’t seem to do just yet. Let’s look at it below.

Gold has recently come back up above its 50 day simple moving average AND its 200 simple day moving average. This gets the big hedge fund’s attention that pay a lot of attention to the technical analysis side of things. These are bullish signs to the technician.

One more bullish sign to the chartist is the “bull flag” formation that is forming as pointed out by the green and red lines. A flag like this forms when prices need to consolidate and “take a breather” after a large run up.

Afterwards, it will break the top red line and head for “new all time highs”. You will see gold reach $1,200 to $1.500 an ounce in 2009 or at latest 2010.

The investor that gets poised for it now can ride that “wave” higher just like a surfer waiting for his wave to come along.

The fundamentalist knows that when the Fed cranks up their printing presses until they are almost smoking (like they are now), that huge amounts of inflation are born out of this. They also know that the dollar becomes more and more diluted and thus there’s a reason to run to what the gold bugs refer to as “real money” a.k.a. “gold”.

Therefore the technicians are buying on strengthening price action over major moving averages. A 2^nd round of technicians will “buy the break” above the top red line of the flag formation.

The fundamentalists will start buying even now and through the year on each “gold pull back” that comes along as they build positions for the next wave higher.

Both camps will likely be “richly blessed” as all of this unfolds. Many will not see this coming and they will scratch their heads as they thought they could put the “tombstone” on any further rally in commodities.

However, commodity “bull runs” tend to last for very long periods of time. It’s just that they have very, very severe pull backs along the way. Many investors think this means that any future upside in them is “dead and gone”. But they will be very surprised to see gold “shine” once again.

This rise in inflation will help stocks and commodities in general as well as foreign currencies (as the U.S. dollar is further diluted).

Comments

[Roger Knights:]

Gold's charts look quite bullish from many perspectives. (There was an article to that effect here on SA last week.) And here's a link to a comment (#17) in a thread on the Kitco site that contains three such charts + indicators:

https://kitcomm.com/showpost.p...

Jan 04 08:28 AM

[DVW:]

Or... Better yet, nobody can predict the future based on lines on a charts and indicators. It's bogus science. Buy or sell based on fundamentals and set your stops correctly... that's how you trade well! There's just as much chance of it dropping to $640 from here as there is a run to $1000.

Jan 04 09:46 AM

[myWealth.com:]

There are technical traders that make money all the time. However, my analysis is usually based off of both fundamentals and techncicals.

Fundamentals will tell you where things are going in the long run but are horrible shorter term "timers". Technicals are horrible long term predictors but great at shorter term timing (not as in calling exact tops and bottoms but getting a person into a trade better than if they'd not had it). That's why I use both and can find benefits to both approaches.

The Flag "technical" formation coupled with the enormous amount of inflation coming by the "printing of money" recently (fundamental) ...both show that gold will head higher in the coming months.


On Jan 04 09:46 AM DVW wrote:

> Or... Better yet, nobody can predict the future based on lines on
> a charts and indicators. It's bogus science. Buy or sell based on
> fundamentals and set your stops correctly... that's how you trade
> well! There's just as much chance of it dropping to $640 from here
> as there is a run to $1000.

Jan 04 12:07 PM

[myWealth.com:]

Yeah, there's a reason why gold has gone from $700ish to $900ish lately. It's the big hedge funds, etc (smart money) that are anticipating the next round of inflation coming. You can't print that large of sums of money without bringing inflation back.

The Fed and Treasury are pushing every button and turning every knob they have to bring us back to an inflationary environment and they will succeed.

Economies turn like ships, so at first, their attempts always seem futile. But eventually, they turn it around.


On Jan 04 08:28 AM Roger Knights wrote:

> Gold's charts look quite bullish from many perspectives. (There was
> an article to that effect here on SA last week.) And here's a link
> to a comment (#17) in a thread on the Kitco site that contains three
> such charts + indicators:
>
> https://kitcomm.com/showpost.p...;postcount=17
>

Jan 04 12:10 PM

[Emerald:]

Investors are very afraid and fear will drive people to bank CD's and gold. I agree that chartists don't really know what will happen but it is obvious we are printing and borrowing money like mad to stave off a deep recession and deflation. Gold is a good hedge to a weakening currency.


On Jan 04 09:46 AM DVW wrote:

> Or... Better yet, nobody can predict the future based on lines on
> a charts and indicators. It's bogus science. Buy or sell based on
> fundamentals and set your stops correctly... that's how you trade
> well! There's just as much chance of it dropping to $640 from here
> as there is a run to $1000.

Jan 04 12:37 PM

[DVW:]

Yep, I'll trust the fundamentals well before I buy what squiggles and indicators are "saying". I've been trading 20 yrs that way and consistently make money... so I go with what works. As for the money printing... when the velocity of that money picks up, you have a point with commodities, gold, oil, food, etc. Till then, it's just a 50/50 trade. Statistics say there is just as much chance of the price of gold hitting your bottom red line as breaking thru the top one.

Jan 04 02:00 PM

[auto44:]

What is that loud whirring sound coming from washington and other places that currency is printed. It' deafening on most continents. It's not just American currency causing the flood. Do ya think something as heavy as gold can float on paper?

Jan 04 08:16 PM

[jepittman:]

If you believe this then you must also be bullish on the S&P 500. Inflation means money chasing goods and services, which means corporate profits rise with a growing economy. Care to comment?


On Jan 04 12:10 PM Sean Hyman wrote:

> Yeah, there's a reason why gold has gone from $700ish to $900ish
> lately. It's the big hedge funds, etc (smart money) that are anticipating
> the next round of inflation coming. You can't print that large of
> sums of money without bringing inflation back.
>
> The Fed and Treasury are pushing every button and turning every knob
> they have to bring us back to an inflationary environment and they
> will succeed.
>
> Economies turn like ships, so at first, their attempts always seem
> futile. But eventually, they turn it around.

Jan 04 10:08 PM

[Jake2:]

You speak of "bonds" and "treasuries" and the "bond bubble" which is the "treasury bond bubble," I assume. You say nothing about other types of bonds however--long term, short term, intermediate--nor anything about bond funds, such as the Vanguard funds, etc. All of this is a bit confusing. Is the "bubble," if it exists at all, only in treasuries? Or does it--like an atomic cloud--envelop all bonds? All of this makes me question not one but all of your premises. Less smoke more mirrors please, the kind that illuminate.

Jan 05 02:33 AM

[myWealth.com:]

Gold will fly high due to the excessive running of the printing presses. This doesn't necessarily instantly happen to the economy and dollar but it does have its effect in time. It won't be too long before it kicks in.


On Jan 04 08:16 PM auto44 wrote:

> What is that loud whirring sound coming from washington and other
> places that currency is printed. It' deafening on most continents.
> It's not just American currency causing the flood. Do ya think something
> as heavy as gold can float on paper?

Jan 05 02:22 PM

[myWealth.com:]

No smoke or mirrors here. That's why I was very clear about long term treasuries. However, There have been excesses across many other bonds as well. But the bubble in treasuries is the main one that is at "bubble proportions" and its the move that has gone parabolic to the upside.

The last couple of days we've seen some big "down moves" in the 30 year treasury. Let's see if this is the topping process or if it still has a bit further to go..

Either way, just the fact that investors know there's a bubble there...they should be buying up gold and other asset classes that I've mentioned in previous articles. Because as it pops, their financial instruments that they are holding will "inflate" and be the beneficiaries of the bond bubble busting.

So the point isn't really to "time" the bubble burst as much as it is to get positioned like a surfer waiting for their wave to come, even now.

The ones that delay may be too late. Better to get in a bit ahead than anything too late. Remember, no margined trades, only investments bought with cash.


On Jan 05 02:33 AM Jake2 wrote:

> You speak of "bonds" and "treasuries" and the "bond bubble" which
> is the "treasury bond bubble," I assume. You say nothing about other
> types of bonds however--long term, short term, intermediate--nor
> anything about bond funds, such as the Vanguard funds, etc. All
> of this is a bit confusing. Is the "bubble," if it exists at all,
> only in treasuries? Or does it--like an atomic cloud--envelop all
> bonds? All of this makes me question not one but all of your premises.
> Less smoke more mirrors please, the kind that illuminate.

Jan 05 02:27 PM

[myWealth.com:]

Yep, gold will float because American paper (the U.S. dollar) will sink once again. It may not do this "overnight" but it will come. Fundamentally, you can't print that much "extra" money and not dilute the dollar.


On Jan 05 02:22 PM Sean Hyman wrote:

> Gold will fly high due to the excessive running of the printing presses.
> This doesn't necessarily instantly happen to the economy and dollar
> but it does have its effect in time. It won't be too long before
> it kicks in.

Jan 05 02:29 PM