|
"What's not to love in this
über-Reflation Rally redux...?"
JUST IMAGINE - two things you think can't possibly happen
together suddenly happen together.
Say like Coca Cola re-launches New Coke,
but people actually like it. Would that mean the laws of physics had been
repealed? Or would you need to change what you think...?
"Gold and bonds do not usually go
up or down together. But try telling that to the markets over the last two
months," writes Mark Hulbert at MarketWatch.
"Since early August, in fact, gold bullion has risen by around 10% and the
Treasury's 10-year yield, which moves inversely with Treasury prices, has
fallen by nearly 15%.
"These moves are substantial, in
other words, and more than just day-to-day noise in the data. What's going
on?"
Put another way, "If the gold price is so high, why are 10-year Treasury yields so
low?" asks a columnist at EuroWeek, the capital markets
newspaper.
To repeat: Rising gold says people fear
inflation. Or so both Hulbert and EuroWeek reckon, along with pretty
much the rest of the planet. But inflation fears would mean rising interest
rates and falling Treasury bonds...and that's the very opposite of what's
actually happening to government debt.
"Either way you look at it then,
recent trends are unsustainable," says Hulbert. "Something's got to
give" apparently. And it won't be his assumption that gold and bonds
shouldn't rise together.
"If central banks take the punch
bowl away at the wrong time," says EuroWeek, "those who have bought Treasuries
will have been on the right track and we will face deflation. Whereas if they
let the party go on for too long the gold hoarders will have been right...and
we'll be wheeling our cash for bread around in wheelbarrows."
The key assumption that makes these two
things impossible, of course, is that gold only goes higher on strong
inflation...a demonstrably idiot claim given a quick glance at the 1930s. Or
this decade's four-fold gains. Or the 50% surge of fall/winter 2008.
Back to gold in a moment, however.
Because while bonds say deflation, "Equities say reflation" as the Pragmatic Capitalist notes, together with David Rosenberg at
Gluskin Sheff and pretty much everyone else.
"The stock market is telling a very
different story from the bond market," TPC explains, and
"unfortunately for equity investors, they have a poor record of
forecasting the future when compared to bond investors."
Yet again, these two things "don't
typically rise alongside" each other. Yet stocks have risen more than
11% since mid-June, while the 10-year Treasury yield (which moves inversely
to bond prices, remember) has dropped nearly 0.7%.
"There have been 4 famous cases of
such bond and stock divergences in the last 20 years. The most famous is the
summer of 1987. We all know what occurred then. The other three cases were
fall '94, summer '98 and winter 2000. All three preceded declines in the
market. Of all 4 instances, three of them preceded 15% declines in the
S&P 500."
Now throw in rising gold prices, and we've got rising stocks...rising
bonds...AND rising gold. Hell, since Wednesday this week they've even pulled
back together, too!
Is the moon made of cheese or what?
The curve-ball in all this - or so we
guess here at BullionVault tonight - is not gold, nor stocks, nor
even bonds. It's the underlying guess-work, intuition, assumptions.
That gold only rises when the cost of
living soars...or bonds only rise when stocks go down...or that a flood of
money, created at zero per cent rates, can't drive all things higher
together, even the promise of cash redeemed in the future...lapped up by a
pensions and finance industry faced with $11 trillion in Treasury-debt
supplied, but a central bank vowing to step in if buying fails and cap any
rise in rates.
Because right alongside, hedge funds and
prop' desks are buying futures and options with virtually free finance.
What's not to love in this über-Reflation Rally redux...?
Adrian Ash
Head of
Research
Bullionvault.com
Also
by Adrian Ash
City correspondent for The Daily Reckoning in London, Adrian Ash is
head of research at BullionVault.com – giving you direct access to investment
gold, vaulted in Zurich, on $3 spreads and 0.8% dealing fees.
Please Note: This article is
to inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
| 
