Bonds & Interest Rates
Martin forecasts rising rates in Europe as well as a rise in the Euro and decline in the US Dollar. A declining US dollar is something not many people are expecting right here – Money Talks Ed
QUESTION: Marty
You mention rates are going up soon in Europe but how can the ECB achieve this when they are still implementing QE. I work in the European HY market and the technicals are horrible as so much money is flooding in chasing yield driving up leverage and deteriorating lending conditions. If rates do go up soon can we expect a spectacular unwinding of the HY bond market that has ground so tight due to CSPP?
Thanks for all your guidance and help in navigating these markets. Thanks so much, keep up the amazing work.
NS
ANSWER: Central banks can only control short-term rates for brief periods of time. They cannot control the long-end. The problem the ECB has is by backing off of QE, it will require private buyers to replace them, which will not happen at negative to low rates. The interest rates will be set by the private sector – not the ECB. The QE program has degenerated from an economic stimulus to simply life-support for member states. The “stimulus” never made it past the governments and we have nearly 10 years of QE that has just failed completely. Once the government have to turn back to private buyers, that is when you will see rates rise sharply to try to sell new debt.
….also from Martin:
With US markets closed for holiday, it has been a quiet, low-liquidity European session, with Asia similarly subdued, while continued USD weakness, now in its 4th consecutive day, has been the main focus as Bloomberg’s dollar index approached its lowest level in three years, helping push the euro up to its strongest since 2014.
Indeed, in lieu of active equity markets, it’s been all about FX and the tumbling dollar and overnight the EURUSD rose to a new three year high just shy of 1.23 before easing off, while cable briefly rose above 1.38 – its highest level since Brexit – and the Mexican Peso was well supported by an unconfirmed Axios reports that was Trump softening his stance on Nafta, at least until Reuters denies it.
The Euro was boosted by growing expectations of tighter monetary policy from ECB, while the chance of a pro-European Union coalition in Germany also boosted confidence in the continent.
“The latest leg up in the euro has clearly come from optimism that the German government is moving towards an agreement for a coalition government,” said Investec economist Victoria Clarke.
CHARACTERISTICS OF BUBBLE CRAZINESS:
- U.S. stocks, according to many measures, are the most over-valued in history. We live in a Bubble Zone!
- Bitcoin and other cryptos are definitely in a bubble, but they could rise even higher.
- Bonds yield little, and in many European countries, less than zero. Central banks have created this distortion to the detriment of savers, insurance companies and pension funds.
- Real estate: Some locations, such as New Zealand, Canada and Australia are up a factor of 8 to 20 since 1980. Houses have become unaffordable for many, even with historically low interest rates.
- Silver and gold: No bubble since 1980. Prices have been repressed since 2011 and are attractive now.
INVESTING IN BUBBLE CRAZINESS:
- Institutions buy stocks because bonds yield so little. This works until the inevitable crash. Think tech stocks in 2000 or 2018(?).
- Institutions and central banks buy bonds trusting the “greater fool” theory. Argentina sold 100 year bonds. What happens when the world runs out of “greater fools?”
- People buy Bitcoin because it is going up, and it might double again from here. Are you comfortable investing savings with that plan?
- Others deposit their digital currency units into a “high yield” checking account that yields 0.01% interest. Or they “invest” in a CD that guarantees a yield of 1% per year in a currency that will be devalued by far more. Others buy a motor coach that depreciates $100,000 when they drive it from the dealer lot. Or they purchase a house that costs $10,000 to $50,000 per year in taxes, insurance, maintenance and utilities before principal and interest.
- Demand value! Not doing any of the above! Avoid fads, bubbles, central bank distortions and obvious financial insanity.
WHAT’S LEFT? GLAD YOU ASKED!
- What has been money for thousands of years?
- What is more permanent than ephemeral digital currency units that are continually devalued?
- Asia has aggressively accumulated it for decades.
- What has been secretly sold from western vaults and shipped to Asia?
- What is used in thousands of industrial and medical applications?
- What has been suppressed by governments and central banks because they promote their own digital and paper currencies which have zero intrinsic value?
THE WINNERS ARE SILVER AND GOLD!
- But “they” claim gold and silver are volatile and dangerous. Gold and silver might go up or down (for a few years) when measured in digital currency units created from “thin air” by corrupt central banks. Gold in 1971 was $42 and is about $1,300 today. Silver prices have increased similarly as central banks devalued the dollar.
- For other examples of volatile and dangerous prices, consider the price chart for Global Crossing stock or Enron stock. Or the NASDAQ 100 from 2000 to 2002 (down 84%). Or the S&P 500 Index from 2007 to 2009.
- But “they” claim gold and silver are relics of a bygone era, and digital is the wave of the future. So why are Russia and China accumulating gold bullion?What happened to Iraqi gold, Libyan gold, and Ukrainian gold, and who wanted it?
- Do dictators escape while carrying paper currency units or gold bullion?
- Would you prefer 100 ounces of gold or 130,000 paper dollars in a ten year time capsule?
- Central banks create trillions of U.S. dollars, euros, pounds, yen and Swiss Francs each year. The Swiss central bank “creates” currency units and buys U.S. stocks. The media thinks “creating from nothing” is normal and healthy, yet informs us that investing in gold, to protect from devaluing currencies, is silly and dangerous!
GOLD AND SILVER IN THE BIG PICTURE:
U.S. dollars are created as debt. Central banks and governments want more currency units so debt, deficits and expenses exponentially increase.
Graph the price of silver (times a trillion) divided by the national debt. The ratio is low because debt has increased rapidly and silver is inexpensive.
Graph the price of silver (times a trillion) divided by U.S. government annual expenses. The ratio is low and silver is inexpensive compared to total U.S. government expenses.
Graph the price of silver (times one trillion) divided by currency in circulation as measured by M3 (St. Louis Fed).
Graph the ratio of silver to the Dow Jones Industrial Average over 30+ years. The ratio is low, as it was in 2001 when silver sold for under $5.00. In early 2018 the DOW is too high and silver is inexpensive. Both will reverse.
SHOULD WE BUY SILVER OR GOLD?
Graph the ratio of silver to gold. Since 1971 a high ratio has indicated the top of a bull market in both silver and gold. But when the ratio is low (silver is inexpensive compared to gold) both silver and gold are cheap, especially compared to other paper and digital assets – like now!
The lows in the ratio show excellent times to purchase both silver and gold, particularly silver. Silver prices are listed in the boxes at the ratio lows. Expect the ratio to increase as both metals rise in price during the metals bull market that restarted in December 2015.
CONCLUSIONS
- Bonds, most stocks, and Bitcoins are too expensive and have risen too far and too fast.
- Some, perhaps most, real estate is overpriced and ready to fall.
- Silver in early 2018 is inexpensive compared to M3, National Debt, government expenditures, the Dow and gold.
Technical analyst Clive Maund discusses why he believes a massive new sector bull market is about to begin in gold and silver.
When you are following the markets closely day after day it can be easy to lose sight of the big picture. So with the “everything bubble” getting closer to bursting, leading to universal mess and mayhem, there could not be a better time to look at the long-term picture for gold and silver, in order to see whether they are going to salute and go down with the ship, as they did in 2008, or constitute a lifeboat and a profitable means of escape for more fortunate investors.
I am therefore pleased to be able to report that it will almost certainly be the latter, for reasons that we will now elucidate on the respective long-term charts for gold, then silver.
On gold’s latest 18-year chart—a time period selected to show the prior 2000’s bull market in its entirety—we can readily see that a potential Head-and-Shoulders bottom has been forming since 2013, and the probability that this is the genuine article, the “real deal” is vastly improved by the dramatic increase in upside volume over the past two years as this base pattern has approached completion, which has driven volume indicators strongly higher over the past year, such that, rather incredibly, the Accum-Distrib line is already close to making new highs, which is a very bullish indication indeed.
It’s pretty much the same story for silver, with two key differences—silver’s Head-and-Shoulders bottom is downsloping and the volume indicators are not quite as strong. However, these manifestations are not negative, for it is normal for silver to underperform gold towards the end of a sector bear market and during the early stages of a bull market.
Are there any precious metals stocks showing similar bottoming patterns? There certainly are—loads of them, and we will have a look at two examples here, one for a larger gold stock and one for a larger silver stock, to illustrate the point, so that you will understand that this is not just an academic exercise—and that you are currently being showered in opportunities to make big money in this sector.
The long-term chart for Gold Resource Corp. (GORO:NYSE.MKT) shows that it is completing a giant Head-and-Shoulders bottom that parallels the one in gold itself, and since the price is still quite close to the low of the Right Shoulder low of the pattern, it is at a good entry point.
The long-term chart for Alexco Resource Corp. (AXU:NYSE.MKT; AXR:TSX) shows that it is completing a fine giant Head-and-Shoulders bottom that parallels the one in silver itself, although it is not downsloping, and since the price is also still quite close to the low of the Right Shoulder low of the pattern, it too is at a good entry point.
Gold and silver have not done well in recent years, having been completely overshadowed by the broad stock market and more glamorous sectors like Biotech, Cannabis, Cryptocurrencies and the FANGS, etc. If they go roaring up, then it means that something else is going to have to go down, and that probably means most everything else in a market crash, which is already being predicated by action in the bond market and other factors, and all the easy money momentum chasers who are now almost everywhere are going to wind up being slaughtered en masse like Pilot Whales on a Faroes beach. We are not going to let that happen to us.
Clive Maund has been president of www.clivemaund.com, a successful resource sector website, since its inception in 2003. He has 30 years’ experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London. He holds a Diploma in Technical Analysis from the UK Society of Technical Analysts.
Disclosure:
1) Clive Maund: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. CliveMaund.com disclosures below. I determined which companies would be included in this article based on my research and understanding of the sector.
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Charts provided by the author.
CliveMaund.com Disclosure:
The above represents the opinion and analysis of Mr Maund, based on data available to him, at the time of writing. Mr. Maund’s opinions are his own, and are not a recommendation or an offer to buy or sell securities. Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications. Although a qualified and experienced stockmarket analyst, Clive Maund is not a Registered Securities Advisor. Therefore Mr. Maund’s opinions on the market and stocks can only be construed as a solicitation to buy and sell securities when they are subject to the prior approval and endorsement of a Registered Securities Advisor operating in accordance with the appropriate regulations in your area of jurisdiction.
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