Chaos in the Government Bond Markets This Week

Chaos in the Government Bond Markets This Week

Both gold and silver were up for the week. Gold moved up strongly from the April 30 closing low of $1,174 to a high for the week of $1,193 to close the week at $1188.40. Silver followed the same trading pattern, closing last week at $16.11, trading up to $16.56 mid-week closing Friday at $16.47.

The big action this past week was in the bond markets. A huge panic sell off in US, UK and German government bonds this week has left traders and investors alike shocked and concerned. From Bloomberg:

“In the past 15 years, a rise in yields of this size has only happened twice – in mid-1999 and again in late-2011, as the ECB began to shore up bank funding issues in the midst of the eurozone crisis. Given that roughly less than 5% of participants in our last … Survey expected bund yields above 50bp by the end of June (we are at 54bp today; nearly one third of the survey expected bund yields below zero), it is likely this … [ed.] has caused a great deal of dislocation for fixed income investors.”

Here is what happened Thursday:

  • 10Y TREASURY YIELD CLIMBS 6BPS TO 2.31%, HIGHEST SINCE DEC. 8
  • BOND SELLOFF DEEPENS; GERMAN 10-YR YIELD JUMPS 17 BPS TO 0.76% 
  • U.K. 10-YR BOND YIELD CLIMBS 8 BPS TO 2.06%; MOST SINCE NOV. 24

Beyond the obvious concern over loss of portfolio value for bond holders, why is this important to US investors?

Keeping interest rates low is the cornerstone of US Federal Reserve central bank policy. Low interest rates and the efforts to drive rates lower still, allow central banks to continue to issue more debt, increasing the total debt load of the government, while the cost of interest payments on that rising debt load remain stable or even decline.

In normal economic times, increasing debt is associated with increasing interest rates because an increased debt load raises the risk of default. By printing more dollars and inflating the currency, central bankers have chosen to ignore this economic fact so that they can “kick the can further down the road” to the next administration.

We have been told that so called “Quantitative Easing” (QE) is a short term temporary measure to stimulate the economy out of recession. The theory behind this strategy is that short term growth will “kick start” the economy for the long term and that the resulting longer term growth will allow a future administration to pay down the debt. This has never happened in the history of the world.

If the money printing strategy worked, then Zimbabwe would be the most prosperous country on Earth. You remember Zimbabwe, the guys with the $ One Trillion Dollar Note.

Today, the relative size of federal debt as a percentage of GDP is the highest since World War II.

China Challenges the London Gold (Price) Fix 

Reuters reported in February that China is planning to establish a Yuan based 1kg gold contract on the Shanghai Gold Exchange (SGE) later this year. Contracts on the SGE settle with the delivery of physical gold as contrasted with the COMEX gold contract which settles primarily (95%+) in US dollars. This will more closely tie the contract price of gold to the actual open market price for the delivery of physical gold, in Yuan, of course.

Currently, the London Bullion Market Association (LBMA) is the world’s standard benchmark pricing authority for the inter-bank trading of gold bullion. Gold prices are published twice daily by this association through polling the members’ bank customers as to what price they are willing to pay for physical gold, rather than by an open market trading system like the Commodities Exchange (COMEX)  in the US or the SGE in China.

The “London Fix” process has been abused by its membership and members have been fined for price manipulation numerous times recently. For example,” last year, the FCA fined Barclays (Bank-ed.) £26 million ($40.2 million) for lax controls after one of its traders allegedly manipulated the gold fix at the expense of a client…” and this,More than 25 lawsuits have been filed against Barclays, Deutsche Bank, HSBC, Bank of Nova Scotia and Société Générale over their alleged role in setting the gold fix. “ (ZeroHedge)

This challenge to the existing gold pricing regime will likely have the effect of allowing a more realistic, free floating price for physical gold outside of the price manipulation of western central banks and will further strengthen the effort by China to establish the Yuan as a viable international reserve currency and present an increasing threat to the US Dollar as the world’s reserve currency. As Rand Paul has said, if we loose the status of the US Dollar as the world’s reserve currency, our standard of living will drop dramatically.

Find out how to defend your assets against rapidly changing and uncertain financial times by calling one of our precious metal experts.

“I’ll be keeping a sharp eye on the market and I encourage you to do the same!”
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