Bonds Weak, Gold Up

February 11, 2009 | By: Peter Cooper

This could be a story of days to come. The Street is gradually realizing that there is no magic bullet to cure the woes of the US economy, and that while bailouts and stimulus plans can take the edge off the worst, things are going to get considerably worse before they get better.

Bond crash coming

The next shoe that appears to be dropping before our eyes is the bond market. Yields are up by around 50 per cent since the start of the year, which has produced an equal loss in the capital value of bonds, with the most recent investors suffering most.

It is only logical that as the US government fuels up public spending, it is going to have to pay more to investors to get them to lend it money. At some point in the not too distant future that will be the trigger for a sell off in the bond market, as existing bond holders are now watching the capital value of their fixed-interest bonds decline.

Since the start of the year, bond prices have declined by some 3.5 per cent, a terrible performance for what is supposed to be an ultra-safe asset class. Investors will only accept so much before they exit.

Safe haven

Indeed, the sudden upturn in gold and silver prices suggests that investors have already found their next safe haven. How long will it be before the trickle to exit bonds becomes a flood, and precious metals leap in value?

Gold bugs have almost tired of waiting for this day. But the market for precious metals is highly manipulated and under such market conditions it is impossible to know the best entry point. You can only buy and hold and wait for the inevitable.

At some point the Federal Reserve and other central banks are going to become so concerned about, say a blow-up in the bond market, that they take their eye off precious metals, but by then it might be too late to buy a significant position at a reasonable price.

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