Bond Yields In The Netherworld - Precious Metals Supply And Demand

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Includes: AAAU, AGQ, BAR, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GLD, GLDI, GLDM, GLDW, GLL, IAU, IAUF, OUNZ, PHYS, PSLV, QGLDX, SGOL, SIVR, SLV, SLVO, UBG, UGL, UGLD, USLV, USV, ZSL
by: Keith Weiner
Summary

Last week the price of gold went up $22, while the price of silver dropped ¢17.

This week, the Monetary Metals Gold Fundamental Price is up $15 $1,436. This is still below the market price.

In the previous week, we mentioned the drop in the Monetary Metals Silver Fundamental Price, saying: "... [it] puts the silver fundamental price below the market price." Last week the fundamental price dropped from $16.21 to $15.72.

A Record Amount of Bonds with Negative Yields to Maturity

Last week the price of gold went up $22, while the price of silver dropped ¢17. The big news last week was that the yield on all German government bond maturities is now negative. They are also all negative in Switzerland. And in Denmark, all maturities out to 20 years are negative. Interest rates are dropping rapidly in the US as well.

More than $14 trillion in bonds now trade at negative yields to maturity - with more than 25% of all "investment grade" bonds afflicted with this policy-induced malady. This is essentially ensuring accelerated capital consumption. As you can probably guess, prosperity is not going to increase as a result. [PT]

Remember the stories about inflation, the rising quantity of dollars, the Fed losing control, and the certainty of higher interest rates? This was way back in fall of 2018. In our report of 4 February 2018, we said:

"The falling-rates trend will resume soon enough. The only question is how big a crisis occurs before the Fed abandons tightening and aggressively reverts to loosening."

By that time, the rate on the 10-year US Treasury note had dropped a bit from its prior level around 3% (and its peak of 3.2%). It was then around 2.7%. The consensus, especially among the gold community, was for higher rates. Now this same Treasury note trades under 1.9%. That's a big drop in yield, around 42% from the peak.

It is also a big capital gain for bond speculators. How will these wealth-affected people boost GDP, what will they buy, and how will they consume the capital now forked over to them?

Keynes was smirking when he said, "... not one man in a million is able to diagnose." He proposed to drive the interest rate to zero, to kill the investor. He counted on the investor not seeing his own death, because the investor is looking at the flip side of interest going to zero: asset prices rising to infinity.

J.M. Keynes, looking up from his book. [PT]

If you wonder why anyone would buy a bond with a negative yield (aside from the problem of being disenfranchised), this is why. A bond - the longer the maturity, the better - is a great vehicle for speculation.

One can buy low-yield bonds, in a speculation the yield will go to zero. One can buy zero-yield bonds, in a speculation the yield will go negative. And one can buy negative-yield bonds, in a speculation the yield will go even more negative.

We have but one thing to add. The temptation to engage in usury increases with each drop in the interest rate. Perhaps the loan shark does not drop his rate, and maybe the payday lender. But there are countless ways to borrow on a self-destructive basis. If Tommy Temptation says "no" at a rate of 10%, maybe he will say yes at 8%. And, if not at 8%, perhaps at 6%...

Fundamental Developments

Now let's look at the only true picture of supply and demand for gold and silver. But, first, here is the chart of the prices of gold and silver.

Gold and silver priced in USD

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio rose this week.

Gold-silver ratio, bid and offer

Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.

Gold basis, co-basis and the USD priced in milligrams of gold

Scarcity (i.e., the co-basis) sagged just slightly. This week, the Monetary Metals Gold Fundamental Price is up $15 $1,436. This is still below the market price.

Now let's look at silver.

Silver basis, co-basis and the USD priced in grams of silver

Scarcity (i.e., the co-basis) is up a little, but not that much. In the previous week, we mentioned the drop in the Monetary Metals Silver Fundamental Price, saying:

"... [it] puts the silver fundamental price below the market price."

Last week the fundamental price dropped from $16.21 to $15.72.

© 2019 Monetary Metals

Charts by Bloomberg, Monetary Metals

Chart and image captions by PT

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.