Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
When Will UK Coronavirus Crisis Imrpove - Infections and Deaths Trend Trajectory Analysis - 8th Apr 20
BBC Newsnight Focuses on Tory Leadership Whilst Boris Johnson Fights for his Life! - 8th Apr 20
The Big Short Guides us to What is Next for the Stock Market - 8th Apr 20
USD Index Sheds Light on the Upcoming Gold Move - 8th Apr 20
The Post CoronaVirus New Normal - 8th Apr 20
US Coronavirus Trend Trajectory Forecast Current State - 7th Apr 20
Boris Johnson Fighting for his Life In Intensive Care - UK Coronavirus Crisis - 7th Apr 20
Precious Metals Are About To Reset Like In 2008 – Gold Bugs, Buckle Up! - 7th Apr 20
Crude Oil's 2020 Crash: See What Helped (Some) Traders Pivot Just in Time - 7th Apr 20
Was the Fed Just Nationalized? - 7th Apr 20
Gold & Silver Mines Closed as Physical Silver Becomes “Most Undervalued Asset” - 7th Apr 20
US Coronavirus Blacktop Politics - 7th Apr 20
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20

Market Oracle FREE Newsletter


Global Bond Market Crash to Drive Gold

Interest-Rates / International Bond Market Apr 19, 2010 - 11:40 AM GMT

By: Neil_Charnock


Best Financial Markets Analysis ArticleThe gold market has been heating up and conditions are moving into an alignment which is ideal for a gold price rally this year. Fear and uncertainty will drive the price northwards even if the current CTFC saga does not eventuate in immediate disciplinary action or regulatory change.

The fact is that the lack of physical supply has been exposed and this will attract more investors to gold as rarity is again bought to the forefront for investors. If the issues raised at the enquiry are to be addressed we could see explosive short covering and gold price action. However this is a bonus I am not counting on at this stage.

Currency risk has escalated due to concerns over sovereign debt levels. Currency movements are now extreme and concerns over which currency one should invest in (if any) are warranted. Gold is acting like a currency not a commodity. It is interesting to note that even though you cannot print gold as a metal the banks have somehow managed to print paper gold which they classified as “physical”. Even the most innocent interpretation of this classification could be viewed as misleading.

I note that the warnings of a bond market crash have been growing over recent months. GoldOz has been talking about this for several months including articles discussing Greece and how their situation is neither unique nor sorted. Pimco has now announced that it has stopped buying all bonds. Therefore they will not be reinvesting any funds in this market when their current bond holdings reach maturity.

Given Pimco are the leading bond investor in the USA and in global bond markets I view this as significant. They generally get the markets right which is why they have grown to be the largest bond fund over their 39 year history. The reason for their stance of course is that interest rates are going up and the cost of capital is increasing. This is a serious problem because this removes the low interest rate tool from the Central Banking system as a stimulus measure.

Given the unsustainable nature of the current historically unprecedented debt load I see severe disruptions to the global economy from the subsequent and inevitable unwinding of this bubble. The key reason interest rates are going up is risk. Risk has to be factored into treasury rates or investors will not invest in them it is as simple as that.

Investors may have read that high interest rates are bad for gold. This comes from the fact that when interest rates are above the true inflation rate it is more attractive to hold cash than gold which does not provide any such return via interest payments. What we are talking about here in present time is somewhat different however.

Then why am I stating that rising rates will be good for gold? In this instance the rising rates will be increasing due to fear and will create fear and uncertainty which are both great for gold. Let’s face it an upward interest rate spiral is not what the world needs now.

As interest rates increase the repayment load increases for governments, corporations, SME’s (Small to Medium Enterprises) and private borrowers. This in turn increases the risk of default and so overall risk increases even further. As rates go up across the board more and more of the disposable income heads toward the banks instead of other consumption which constrains growth and therefore government and business incomes.

As income falls across the board outside the banking system we see greater risk factored into lending, bad news on bond offerings and higher rates. This leads to job losses (or business failure) which causes loan defaults and then foreclosures as we have seen in the USA and elsewhere. The defaults are not immediately acted on by the banks so this all takes time. You have to default on several payments before the bank will take this step and it takes a further 6 months to sell the asset.

Of course it takes time before employers lay off workers. Interest rates are still relatively low so this effect takes time to flow through the system which fights this decay every step of the way.

What I am describing is of course the pathway to GFC2 which will take some time. It starts with events like Greece and the contagion slowly spreads through the system. This is a decay so feared that you now see denial as nobody wants to see it but again I state this is great for gold and ultimately gold stocks.

In other words this can easily turn into a spiral forcing governments to just print new money rather than borrow it to keep things afloat. If they cannot secure funds via treasury auctions then they are forced to print. This causes currency upheaval and if the tipping point, which would be a loss of confidence in the currency occurs then this can develop into a hyperinflation.

Estimates vary however it would seem that the debt burden the world now faces is at least double the one that existed before the great depression of the 1930’s. Credit was completely removed from the system in the USA back in the 30’s which completely crashed the economy. The crash occurred at that level of severity despite there being excellent manufacturing capability, demand, skilled labour and infrastructure and the will to keep the game going.

We may have learned from that disaster and there are now mechanisms in the tool chest of the banking system that most people are not aware of however my question is: who will be able to afford the new credit? How many countries, institutions and individuals are not fully leveraged at present? Imagine what will happen if interest rates hit 15% in a few years time. What happens to asset prices in that sort of environment?

My interest as a gold analyst is what happens to gold and gold stock prices as current trends evolve. I am not here to warn people about other asset classes if they cannot see the writing on the wall they will, unfortunately have to face the consequences. I believe that gold investors have to get their head around the issues at hand however.

If bonds are unattractive and property is falling then investment choice is diminished across the asset classes. This makes any viable investment like cash or gold or gold stocks a rare thing so investment flows will be more concentrated forcing prices higher than might otherwise be expected.

Assets that require borrowings for purchase have to fall in value because at 15% the amount you will be allowed to borrow will be smaller due to the servicing cost. In other words if the maximum debt you can afford to service is a $1M loan at 6% then you will only be able to afford to service (repay) a $500k loan at 12%. If the bank then tightens the equity requirements (deposit) on the borrowings then the maximum amount you can borrow also decreases.

Decreasing borrowing cost has driven certain asset classes much higher because people could “afford” to borrow more. Easy credit conditions have enabled more buyers to enter the market which has increased demand. Now unwind all that and see the future for yourself. The one thing banks fear is deflation of their investments and this is what they face. Their investments include all our borrowings as well as their own hard assets.

Fear is the most powerful driver of any investment mania and there is nothing like a gold mania. What I am pointing to is that fear will be increasing as denial gives way to reality. Investment choices will be growing more and more limited. Currencies will appear to be more and more risky and hence gold as the ultimate currency will be more attractive.

Cash creation in the absence of the ability to sell ludicrous amounts of treasuries will appear like the only way out for many governments as this crisis deepens. Facing reality is not a strong point of governments as they face immense pressure to pull rabbits out of their hat. Pressure groups lobby and push and pull, advisors advise on how to get elected apparently without much attention to fiscal restraint. Paying off the debt and tightening the belt is not palatable under the vast majority of economic systems we have in place around the globe.

Many Australian gold stocks are selling at a deep discount below their intrinsic value, particularly some of the smaller emerging producers and mid tier producers. As the gold price increases the marginal high cost producers will become significantly more attractive however this is not an investment case until this occurs.

Given the emerging trends on the interest rate front I prefer to select the stocks with zero or insignificant debt. The potential of a rising gold price is also significant so hedging will again become a problem area on the balance sheets of gold companies that are forced into this practice. I do appreciate that borrowings have to be hedged at times so there is a place for a small forward position if kept to a minimum.

One of our newer producers has a hedge book at nearly $1600 UD per oz which will not be a problem. Fortunately many of the gold producers have reduced or eliminated their hedges over recent years. The real kicker for the sector is that over recent weeks we have seen strong, across the board share price rises yet we are still well below pre-GFC1 levels.

Progress has never been stronger for the sector and I also note a report just landed on my desk about an exciting new float. I came across an emerging mid tier polymetallic producer with a PE of 1.6 and market cap of about $30M today and updated it but this is just the tip of the speculative end of this sector. The emerging producers and some of the mid tier producers are already in bargain territory and I hope to see some downside price action soon to enable even more attractive buying conditions.

We have ASX listed gold stocks operating in all corners of Australia the across the globe including several in Africa and Asia making some interesting finds. There is no shortage of value, latest mining techniques, excellent management and growth opportunities in this gold sector. I am now starting to update all the news in the GoldOz Members areas ready for a complete review ahead of the buying season over the coming weeks.

Leading investment funds have become more active in recent years Down Under supporting my view that global investment flows are headed this way. Australian gold stocks have long been viewed as a bit out of the way however the globe is shrinking with information flowing across the WWW in mere seconds. This gold sector is probably the most undervalued anywhere when compared to the low sovereign risk we enjoy in Australia.

I have been saying this for over three years across the worlds leading gold sites – the Australian gold sector will play catch up on the global gold stock valuation scale. This is slowly happening as these leading finds begin to take positions. I think they must agree with me that the whole global gold mining complex will benefit from the coming gold mania.

I was talking to a fund manager in the US the other day who has been really pleased with my services and his investments in Australia. His view is that we are going to have a lively 2010 for the gold stocks around the world. We either follow on from here if he is right or we take off a little later after a pause; I don’t mind either way as investors will preserve or grow their capital.

Good trading / investing.

Neil Charnock

GoldOz is currently developing a Member area and has added further resources for free access. We have stepped up our research and stand by to assist investors from all walks of life. We sell an updating PDF service on ASX gold stocks from only $AUD35 for 3 months – the feedback is grateful and enthusiastic because we are highlighting companies that have growth potential and offering professional coverage of the sector. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia , brokers, bullion dealers and other services.

Neil Charnock is not a registered investment advisor. He is a private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services.  The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, further more conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.

Neil Charnock Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules