Monday, February 4, 2013

Bonds on the Brink of Chaos

There are indicators showing that there is a shift taking place in the financial markets of huge proportions.

One you might want to heed.

Here are a few thoughts and observations from my current reading.

Here is a list of the major market trends since the 1970s:
1970s Commodities
1980s Bonds and the Japanese Stock market
1990s US stock market and Technologies
2000s Commodities and Bonds
2010s Stocks?

So it appears the 30 year trend in bonds is coming to an end? So what happens if bonds go the way of the Dodo? Who benefits and where does this place precious metals?

Stocks are now outperforming bonds. The DOW has just shot through 14,000 for the first time in 5 years. Maybe there is that stiring in the dark places of the interest swap market that is indicating a rise in future interest rates. Bonds will be subject to losses if interest rates rise. Some big players maybe seeing this and beginning to race out of bonds and placing their money in stocks where they see (initially) the best return. They may even see the stock market as a safe-haven?

If you treat gold and silver as commodities, and the likelihood is that silver still very much behaves like a commodity for now (see graphs below), then you may think the bull market in gold and silver may also be in jeopardy because of this giant trend shift to stocks.

1 year Continuous Commodity Index chart
1 year Silver chart

Note the correlation between silver and the CCI as compared to silver in the past year.

But that will probably not happen. In Figure 3 (courtesy of, gold has been offering a distinct advantage over bonds. Historically, gold performs well during periods of inflation. Bonds, however, are severely hurt by inflation, which wipes out the purchasing power of the principal balance as well as the purchasing power of the bond yield.


Well, that's the story for gold and bonds, but what about this new trend to stocks. Will this see gold and silver being out-muscled in the bull market game as compared to stocks.

Probably not. Remember those days of high inflation in the 1970s when investors ran to precious metals for safety? This is the most likely outcome when the stock trend runs out of steam, which it is likely to do very quickly in this current volatile environment.

Of course, such a trend into stocks may help the economy feel better and people feel richer which the Fed wanted. But the flight out of bonds poses even more difficult scenarios. Governments require bond sales to finance already bloated current and future spending and interest expenses. Hang onto your hats for an increase in the debasement of money as direct debt monetisation ramps up to finance bonds directly.

Great investors have recommended that you switch between stocks and bonds depending on when one or the other gets overvalued. But what if, this time it is different, and they both go bad together. In other words, confidence in both to hold value gets hammered for the last time.

What then? What will you want to be holding in your hand?

Gold in New Zealand dollars: $1977.17 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $37.63 per oz
Previous all-time high: $59.19 per oz (30 Apr, 2011)

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