Bonds Weak, Gold Up

Wall Street was unimpressed by the $500 billion toxic asset control program unveiled by new US Treasury Secretary Tim Geithner Tuesday. Stocks dropped by 4.9 per cent while money flowed into treasuries and precious metals.

This could be a story of days to come. The Street is gradually realizing that there is no magic bullet to cure the woes of the US economy, and that while bailouts and stimulus plans can take the edge off the worst, things are going to get considerably worse before they get better.

Bond crash coming

The next shoe that appears to be dropping before our eyes is the bond market. Yields are up by around 50 per cent since the start of the year, which has produced an equal loss in the capital value of bonds, with the most recent investors suffering most.

It is only logical that as the US government fuels up public spending, it is going to have to pay more to investors to get them to lend it money. At some point in the not too distant future that will be the trigger for a sell off in the bond market, as existing bond holders are now watching the capital value of their fixed-interest bonds decline.

Since the start of the year, bond prices have declined by some 3.5 per cent, a terrible performance for what is supposed to be an ultra-safe asset class. Investors will only accept so much before they exit.

Safe haven

Indeed, the sudden upturn in gold and silver prices suggests that investors have already found their next safe haven. How long will it be before the trickle to exit bonds becomes a flood, and precious metals leap in value?

Gold bugs have almost tired of waiting for this day. But the market for precious metals is highly manipulated and under such market conditions it is impossible to know the best entry point. You can only buy and hold and wait for the inevitable.

At some point the Federal Reserve and other central banks are going to become so concerned about, say a blow-up in the bond market, that they take their eye off precious metals, but by then it might be too late to buy a significant position at a reasonable price.

Comments

[FredTheSpectre:]

$10T before its over with. Gold = Dow at some point. Don't wait for inflation to come before you invest because many will be way ahead of you. Spot on, Peter.

Feb 11 12:12 PM

[oldman:]

for a retired investor age 75, how should the fixed income allocation be set? Approx 75% bonds, but where?

Feb 11 12:12 PM

[yellowhoard:]

Buy TIFs Old man.

Feb 11 12:36 PM

[old boat guy:]

You are listening to the same jerks that created this mess. All bets are off; use your head.


On Feb 11 12:12 PM oldman wrote:

> for a retired investor age 75, how should the fixed income allocation
> be set? Approx 75% bonds, but where?

Feb 11 12:44 PM

[old boat guy:]

oldman you are listing to the same idiots that created this mess. All bets are off; use your head.

Feb 11 12:46 PM

[MarvinMBA:]

Some comments from someone else:

Bank of America’s Bernstein Says Bank-Rescue Plan Won’t Work
Email | Print | A A A

By Lynn Thomasson

Feb. 11 (Bloomberg) -- The U.S. Treasury’s bank-rescue plan won’t repair the financial system or revive credit markets, Bank of America Corp. strategist Richard Bernstein said as he recommended avoiding the industry’s shares.

Treasury Secretary Timothy Geithner pledged up to $2 trillion in government financing yesterday for programs aimed at spurring new lending and addressing mortgage assets that are difficult to value. The government’s prior measures to prop up financial institutions included backing $118 billion of Bank of America securities and injecting $45 billion into the Charlotte, North Carolina-based bank after it bought Merrill Lynch & Co.

“Financial stocks are likely to be as toxic to portfolio performance as banks’ assets are to their balance sheets,” New York-based Bernstein wrote in a research note. They plunged yesterday, driving the Standard & Poor’s 500 Financials Index to an 11 percent drop, on skepticism the rescue package will work.

Bernstein said the government should increase deposit insurance, seize assets, shut “large” banks and encourage takeovers.

“The history of bubbles clearly shows that the significant consolidation of the financial sector is inevitable,” the strategist wrote. “The latest Treasury program is simply another attempt to stymie the consolidation process.”

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.n...

Last Updated: February 11, 2009 11:47 EST

Feb 11 12:51 PM

[Jake2:]

Zero content. Reader, pass by.

Feb 11 12:55 PM

[phdinsuntan...:]

oldman,

buy 50% venezuelan bonds and move to margarita
island, you will be paid ind usd and u will spend in depreciated
local currency. If USD goes down your bonds will go up with oil.

Split the other half in time deposits on Euro, the Swiss Franc, the Norwegian and Danish, Swedish Krona, avoid the Yen, add Chinese Yuan if you can get them, add Brazilian Reals, a good chunck, the Singapore Dollar, the Australian Dollar and the New Zealand Dollar.
TIF will go south anyway if China sells the USTBs.

Pretty safe bet for your golden years, sunny days and you can
go fishing with Ws father and local partners.

Feb 11 01:34 PM

[Roger Knights:]

You know it's not just a recession when Bloomberg has this headline:

"Diageo Reduces Profit Forecast as Weakening Economies Cut Sales of Liquor"

Feb 12 04:30 AM

[HERMANNE:]

JUST BUY SILVER AND OR GOLD
UNLESS YU REALLY UNDERSTAND MONEIES MARKETS
YU WILL JUST GET SCREWED THERE TOO
WHAT PERCENT GOLD AND SILVER IN YOUR ACCOUNTS 75 TO 85 PERCENT
NO BANK CD S THEY WILL GAMBLE AWAY YOUR MONEY AND LET THE TAXPAYERS GIVE THEM BAILOUT MONEY TO REPEAT THEIR SCHEMES

Feb 12 09:01 AM

[Boubou:]

I moved to Antigua. Its a nice place in which to be poor, And the way things are going ., that's me.
There are no taxes on distributions ( if any) and if you like chicken and rice you can live on thin air.
Heating and cooling costs are nil Gas is expensive but you can only drive 15 miles and there's not a lot of reason to do that if you live in the right spot.

Feb 12 09:21 AM

[kelm:]

The Chinese are asking for Guarantees on our bonds as they see our extreme fiscal profligacy as threatening their investment.

The ECB has come out publicly today and stated they are concerned about the likely loss of confidence by investors in government bonds.

www.bloomberg.com/apps...

So the talk is starting. If you are going to short bonds do take a close look at the charts to judge your entry point and be prepared for volatility.

As my readers know, I am long PST, TBT, CEF, TGLDX, UDN and have been adding to my short bond and long precious metals trades on weakness.

Feb 12 12:05 PM