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Gold Continues Rally As Bonds Blast Higher With The 30 Year US Treasury Rising More Than The 10 Year Note

Stephen Bernard, of the Associated Press reports that stocks, VT, fell some in early morning trading after Japan became the latest country to show signs of slowing growth. Japan says its economy grew just 0.1 percent in the second quarter. That’s much slower than the 1.2 percent growth in the first quarter. Investors continued to snap up Treasurys Monday, driving interest rates lower.  The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.58 percent from  percent. Its yield is often used to help set interest rates on mortgages and consumer loans. Overseas, Japan’s Nikkei stock average fell 0.6 percent. Britain’s FTSE 100 fell 0.3, Germany’s DAX index dropped 0.1 percent, and France’s CAC-40 fell 0.8 percent.

The chart of the interest rate on the Ten Year US Note, $TNX, shows that investors either have attained or are near attaining peak investment safety as the rate approaches the rate on Excess Reserves rate and the Fed Funds rate.  I believe that a rapid rise in this rate could easily precipitate a liquidity crisis where one may not have fluid and immediate access to one's investments.

I believe the world entered into Kondratieff Winter August 11, 2010 as both major and developing currencies were sold off against the Yen, resulting in a rise in the US Dollar and a sell off of stocks and commodities.  

Carry trade investment flowed out of Natural Gas, UNG, fell 2.5%, to its April lows.

Base Metals, DBB, rose. I’ve been recommending that one sell Tin, JJT. One would have been stopped out, as it blasted 2.1% higher.  

The Euro Yen carry trade, the EUR/JPY,  continue to unwind today closing at 109.39, initially causing world stocks, VT, and commodities, DBC, later to fall lower, as the currency traders called the Yen, FXY, higher back over 116.

The chart of the Yen, FXY, shows today’s 1.1 move higher in the Yen, to basically its recent high, is in stark contrast to its last trading of three black crows.   

The plunge protection team entered early in the day, and stocks rose restoring market stability and stocks, VT, finished 0.4% higher.  Of note Financials, XLF, and European Financials, EUFN, both finished 0.3% lower. 

The currency traders went heavily short the New Zealand Dollar, BNZ; and they went long the Swedish Krona, FXS, as well as the Swiss Franc, FXF higher. The major currencies, DBV, fall sharply lower, while the emerging currencies, CEW, rose higher as did the Euro, FXE. Substantial profits have come to currency traders who went short the New Zealand Dollar and Japanese Yen carry trade. It was no surprise that the Swedish shares, EWD, rose over 2%. Chile, ECH, rose to a new high.

Setyo Wibowo in EURUSD Forecast for August 16, 2010 relates: “movement below 1.2700 key support area could be seen as a serious threat to the bullish outlook”. The Yahoo Finance chart of the Euro, FXE, shows a close today at 127.74. I relate that a fall in the Euro, below 127.74 will precipitate a sell off of a number of the ETF listed in my chart site: 15 ETFs to sell short and 7 ETFs to buy long for a debt deflationary bear market.

It’s very likely credit liquidity will evaporate when bonds trade lower and interest rates rise, given the weakness of the stocks market and the meteoric rise in the US Treasuries.

The interest-rate on the US 10 Year Note, TNX, and the interest-rate on the 30 Year US Government Bond, TYX, may start to rise later this week in response to the Obama Administration  Conference On The Future of Housing Finance to be held tomorrow August 17, 2010, or simply in response to the terrifically high yield curve. 

The rise seen in the Chart of the Yield Curve $TYX:$TNX is quite stunning. It has a major factor driving gold, $GOLD, higher since late 2008 and especially since April 2010.

It is interesting to follow the Interest Rate on the US Ten Year Note, ^TNX, compared to the Interest Rate on the 30 Year US Government Bond, ^TYX, and gold:  ^TNX, ^TYX and GLD shows that a rising yield curve has created an investment demand for gold, GLD, which rose to 118.7 on the week ending August 13, 2010 and is now at 119.7 continuing a breakout that began August 6, 2010.

Gold, $GOLD, may rise even further as investors transfer out of bonds now that they are peaking out and as a liquidity crisis developes; but its chart shows that it has risen to the middle of a broadening top pattern to close at $1,224.   Jesse provides today’s charts of $GOLD and $USB

Yes, I foresee a liquidity evaporation as the bond bubble bursts: a black swan event where there are not enough buyers in the equity and bond markets to meet selling demand. At that time physical assets like gold will be in great demand. 

One can view the Yahoo Finance chart of debt, BND, IEF, LQD, EMB, MUB, CMF, JNK and TLT or the Finviz Screener of Debt or the Google Finance chart of BND, IEF, LQD, EMB, MUB, JNK and TLT, to view daily bond trading activity.

TLT blasted 2.5% parabolically higher

IEF blasted 0.7% higher

LQD blaster 1.1% parabolically higher

BAB rose 0.8% parabolicallyhigher

MUB rose 0.4% higher

EMB  rose  0.2% higher

CMF  rose 0.2% hiher

JNK rose 0.5% highre; but represents a good short selling opportunity as it has weakened recently. My investment maxim is in a bull market be a bull and in a bear market be a bear. In a bull market one buys on dips and in a bear market one sells into strength. In as much as Junk bonds have entered into a bear market, today’s rise is an excellent short selling opportunity. 

The Yahoo Finance five chart LAG, BND, and AGG, shows a comparison of all three comprehensive bond ETFs. The Finviz monthly chart of AGG shows the dramatic rise in bonds.

Of the three summary bond ETFs, LAG, BND, and AGG, LAG may be the first to turn down. The chart of BND shows today’s 0.4% jump.

The spread between DXKSX and DXKLX  and the spread between TMV and TMF serve as the canaries in the bond market coal mine, relating when to go short US Government Bonds by going long with TMV

The dramatic rise in US Government Debt can only be accounted for by one of two things, a yen carry trade in US Treasuries or monetization of the debt by proxy Treasury buyers in major financial trading centers such as London, and Switzerland.  

The stupendous bubble in the 10 Year US Note, IEF, and the 30 Year US Government Bond, TLT, creates systemic risk as there are unlikely to be enough buyers of the debt to meet selling demand, when all the crowd rushes to the market’s exit doors.  

I believe that out of the liquidity crisis, Credit Bosses, what I call Credit Seigniors, will be appointed to issue and manage credit, as the debt bubble implodes and the economy shatters.

Here in the US, I envision, that out of a coming credit crisis, where there is no credit available, a Financial Regulator, will exercise Discretionary Governance, and announce a Home Leasing Program administered by the banks on their REO properties and those of Freddie Mac, Fannie Mae and the US Federal Reserve.

I am of the conviction that mortgage lending and securitization of loans will cease, and leasing of homes will be a public private partnership cooperative endeavor. Companies that have done servicing mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value.

I also envision that this Credit Seignior, perhaps in public private partnership with American Express, AXP, and Capitol One Finance, COF, will provide seigniorage for credit. He will provide finance and issue credit mostly to those companies which serve strategic national needs.

In Europe, I see a new role for the President of the ECB.  I envision that in response to severe credit contraction and banking ill-liquidity, that he also will be Credit Seignior, as he accepts sovereign and other debt and issues credit to Eurozone member banks thereby keeping some degree of money liquidity flowing.

When the debt bubble bursts, the world will see “the end of credit” as it has traditionally been known, where credit comes from the seigniorage of sovereign nations issuing sovereign debt and financial institutions securitizing bonds. 

Governments will become seignior, that is they will exercise seigniorage and become the first, last and only provider of credit. Then only food stamps and strategic needs will be financed.  

National and regional seigniors throughout the world will likely be networked through unified regulation of banking globally as related in  James Politi and Gillian Tett Financial Times article NY Fed Chief In Push For Global Bank Framework. Eventually, a Global Seignior will arise to boss them all. 

Disclosure: I am invested in gold coins