Failure of Bond Market Highly Positive for Gold and Silver

Analysts say the US will have to triple its bond issuance this year to meet the cost of federal bailout and stimulus packages, while in the UK the printing of money has sent 10-year gilt yields tumbling from 3.64 to 2.94 per cent.

The Bank of England’s move to quantitative easing by buying government securities to boost the supply of money is being closely watched by the US as a route it may follow shortly.

Now the lower yield on Bank of England bonds sounds like an initial success, as bond holders will experience a rise in the capital value as the yield declines. However, surely the problem then is future bond issuance at lower yields. Will buyers want this low yielding paper?

Inflation returns

And surely the obvious problem ahead is that printing money inflates the money supply and causes inflation. And what is the asset class most likely to suffer from inflation? Why, bonds with low interest rate returns that will quickly turn negative in an inflationary environment.

The rush towards the exit in the bond market could quickly turn into a flood, and into which alternative asset class will these bond refugees go? Cash will be little better than bonds if interest rates are low.

Indeed, your main investment criterion will be the preservation of capital value against inflation, not interest or yield. If the supply of paper money is rising then your only option is to shift to a foreign currency with a stronger and better managed economy, or buy precious metals which have a far more fixed supply and therefore do not suffer from inflation.

Precious metals

In today’s world of competitive currency devaluations there hardly seems a currency alternative worth considering, even the Swiss have been tampering with the franc. Your only real option is to buy gold or silver.

Thus, as the bond market chokes from an oversupply of new paper and quantitative easing, the attractiveness of precious metals will grow. And given the narrowness and relatively fixed supply of the gold and silver markets, the upward leverage on prices will be considerable.

In short, any serious compromising of the bond market is highly positive for gold and silver, and an accident waiting to happen as governments flood the world with debt. Of course, when the bond market crashes that means governments will have to face economic reality and match expenditure with revenues, something likely to prove very painful.

US Treasury data showed that foreigners were net sellers of US securities in January, a worrying signal that all is not well in the bond market.

Comments

[yellowhoard:]

Sure, bonds will sell off, gold will go up, the dollar will go down. But, we will have massively higher energy taxes. So, it's not as though the new administration hasn't done anything.

Mar 17 01:55 PM

[williemo:]

in the short run, gold and slv should decline. In the mid, to longer term, the metals will increase, as you'vd said..... but, I would be a seller here. If you look at GLD's chart and see the fundamentals of where we are right now, it can easily sell off to the 800's or even 700's, before eventually going higher.

Mar 17 02:24 PM

[Roger Knights:]

So far gold's support at 900, which is also its trendline, has held up well, which is encouraging. I think there could be a big rise within a couple of weeks, given the number of known shoes that are poised to drop. (And the possibility of unknown or unlikely shoes that may also drop.)

Mar 17 02:47 PM

[Roger Knights:]

PS: I think that there isn't as much downside in gold as there used to be, given that some big money investors are now sold on gold's story in this environment and poised to buy on dips, and now that the conventional wisdom is beginning to recommend that gold make up a portion of everyone's portfolio.

Mar 17 02:52 PM

[No Eye Deer:]

I have bought a bit of gold.. The main reason being the loss of confidence in the people in charge. All I hear now is bigger and bigger deficits. Bigger sums to spend on fiscal stimulus's..

The only solution to this mountain of debt is inflation.

I

Mar 17 03:48 PM

[Chris-africa:]

With all the governments on the back of all the off shore tax havens,and making Switzerland,Luxembourg and Austria open the books to catch all the TAX evasion people form the U.S and U.K. Were do you think these people are going to put their money .Gold coins are still the best way to store large value in a small place. That`s why the governments hate gold,they cant tax and control it like currencies .If I had the IRS on my back the best way to hide value is still GOLD.So with this in mind should we not see a demand for GOLD rise in the short term.

Mar 17 03:53 PM

[SW Richmond:]

"IMF poised to print billions of dollars in 'global quantitative easing' "

www.telegraph.co.uk/fi...

"Alistair Darling and senior figures in the US Treasury have been encouraging the Fund to issue hundreds of billions of dollars worth of so-called Special Drawing Rights in the coming months as part of its campaign to prevent the recession from turning into a global depression."


What are SDR's?

www.imf.org/external/n...
"Why was the SDR created and what is it used for today?

The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in world foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets— gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.

However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.

Today, the SDR has only limited use as a reserve asset, and its main function is to serve as the unit of account of the IMF and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

SDR valuation

The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies,today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-value of the SDR is posted daily on the IMF's website. It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market."


It appears to me that, in an effort to further obfuscate currency debasement, the major central bankers are urging a non-accountable global agency to do the debasement for them. Since SDR's are redeemable in "real" currencies, guess how central banks will respond to the faux increased demand for their currencies?

"Wow, look at that dollar strength! There must be really strong demand for dollars! See, the printing we're doing isn't hurting anythng at all!"

Mar 17 03:57 PM

[D. McHattie:]

With such a high debt level, what are the odds the government will take the easy way out and devalue their obligations by devalueing the currency in which those obligations are denominated?

Once this devaluation (inflation) process begins, what are the odds the government will have the skill and fortitude to control it?

Mar 17 03:58 PM

[willibald:]

Sell into the stockmarket up-days and buy gold. The way the world is unfolding that is the only bet you should make. The dominos will keep on falling. Nobody can turn this mess around. World war 3 anyone?That is how they stoped the great depression and don't let anybody tell you otherwise. None of the clowns in government knows what to do. What we are seeing is an new experiment without precedent. It
will end with the total distruction of all fiat.

Mar 17 05:11 PM

[mr freddo:]

You are preaching to the choir here Mr. Cooper. And I especially like the picture of American Eagle gold and silver coins that you include here. Aren't those coins beautiful works of art?

On the downside, it appears that the traditional jewelry buyers from India have reduced their gold buying significantly. This is having a dampening effect on gold.

While we are in crisis mode, I believe that you have the new buyers of gold picking up the slack for the Indian market. As the crisis eases, gold may drop a bit as the new investor buyers trade back into equities.

But once inflation picks up, gold will gain in strength as investors pour out of bonds and into gold for inflation protection and the Indian gold buyers come back to the market.

So, over a 4 year horizon, gold should perform well. I keep a percentage of my portfolio in gold and silver ETF's as insurance.

Mar 17 08:25 PM

[Vuke:]

There's a smell of funny money in the air these days, especially in all the talk of stimulus packages, IMF, World bank and SDR's.

With unprintable deficits, unimaginable bonuses and wild currency fluctuations it may be best to keep a little silver and gold around until a sensible world returns. Sure, buy a little oil and dabble in markets but if you do earn some paper, turn it into gold.

When real money returns, that should be worth something.

Mar 17 10:24 PM

[samwise:]

First off whose the guy in the gold suit? Reminds of the movie "gold-member." In any case--doing great until your last line "foreigners were net sellers of securities in January...a worrying signal that all is not well in the bond world." There's a consensus in the world but it's not that gold is the answer. The answer is higher energy and food prices which allows governments to borrow cost free and appear to be "solving problems." Don't argue with ownership of gold coins--any coinage actually is worth "owning" in the sense of being a collector right now. But that's not where the big money is going to be made. Exxon Mobil supposedely discovered 2 billion barrels of recoverable oil off Brazil--and you can bet your going to pay T-Rex (as in Rex Tillerson the President of exxon/mobil) a PREMIUM for every drop of it. In the meantime Wall Street is LITERALLY laughing all the way to the bank because while all this resource money is going to end up in their three remaining banks (Goldman Sachs, JP Morgan Chase and Morgan Stanley) so will ALL YOUR TAX MONEY which was used to bail out these perfectly healthy financial institutions. Still angry over AIG? That's funny because they're the screw-ups and wouldn't even have any money if you hadn't given it to them. Have a nice day and keep votin' for those same old Democrats.

Mar 17 10:24 PM

[yellowhoard:]

I love Golllldddd!

Schmoke and a pancake?
Bong and a blintz?

Mar 18 12:14 AM

[Munim:]

Hey Yellowboard..
I am a novice at Finance. Can i know what is a Gilt fund?,
Thanks


On Mar 17 01:55 PM yellowhoard wrote:

> Sure, bonds will sell off, gold will go up, the dollar will go down.
> But, we will have massively higher energy taxes. So, it's not as
> though the new administration hasn't done anything.

Mar 18 12:27 AM

[yellowhoard:]

It's a British thing Munim. Invests in high quality government debt. If there is such a thing in Britain.

Mar 18 12:38 AM

[Munim:]

Thanks Yellowboard Bro

Mar 20 10:20 AM