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Here's a significant story that's not getting much
play:
Chart 1 - 10-yr Bonds breaking below support
For over 2 months, Long Bonds have been marching
relentlessly lower, breaking key support at 106.50 last Friday. The next
downside target is the Jul 06 lows at 104 (which equates to 5.25%).
Here's where is gets curious:
The news last week was decidedly negative, weaker
than expected 1st quarter GDP growth and a string of layoffs at some of the
nation's biggest employers (Dell, Pulte Homes and IBM).
That's a sign growth is slowing right? That should
be bullish for Bonds. As price inflation fears subside, Bonds should rally.
Hell, even Gold buys that story and has been moving lower since early May. So
what's happening? Why are Bonds tanking?
I know markets discount the future and that news is
effectively ancient history. I've been telling subscribers for a while that
there are intermarket forces at work pulling Bonds
lower and forcing yields higher. That force is a declining US Dollar, where
Bonds have been following the Dollar lower with a 2 to 3 month time lag. [The
US Dollar bottomed in late April so we have at least 1 more month of Bond
weakness ahead.]
But that still doesn't answer the conundrum, why are
interest rates rising in the face of a slowing economy?
By the way, since February, the short end of the
curve has been dropping precipitously. The yield curve has widened
substantially, even righting itself from its previous inversion. Investors
are voting with their wallets and they're saying the Feds next move will be
to cut interest rates in response to a slowing economy.
So if short term interest rates get it, why don't
long rates?
I think they do.
Chart 2 - Nikkei weekly ; Gold (behind) and 10-yr US
Yields (below)
The major holders of Long-term US Bonds are Japanese
investors. A slowdown in the USA
is causing Japanese investors to sell US Bonds (raising rates) and repatriate
their funds back home to invest in Japanese stocks with offer more promising
prospects. More promising because Japan is a net exporter and the weak Yen
is a boon to Japanese Corporations.
The upshot for Gold investors (as the above chart
shows) is that Gold is very closely tied to rising Japanese stocks. Interest
rate sensitive Banks and Housing stands to be the most negatively effected.
A slowdown in growth is causing a shift out of US long-term
debt into the Nikkei and by correlation into counter-cyclical Gold. Expect
the above trends to remain in place for some months yet.
More commentary and stock picks follow for subscribers…
Greg Silberman CA(SA), CFA
greg@goldandoilstocks.com
I am an investor
and newsletter writer specializing in Junior Mining and Energy Stocks. Please
visit my website for more free articles and analysis
Click here: http://blog.goldandoilstocks.com
This article is
intended solely for information purposes. The opinions are those of the author only. Please conduct further research and
consult your financial advisor before making any investment/trading decision.
No responsibility can be accepted for losses that may result as a consequence
of trading on the basis of this analysis.
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