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 Gold extended to the upside again on Friday to establish a new
three-week high of 1278.13 before dipping back into the range. The yellow
metal is being underpinned by a general 'risk-off' mindset, amid mounting
growth risks and dimmed expectations that the Fed will move to raise rates
this summer.
Risk aversion is being reflected by strong demand for global bonds, which
have pushed yields to record lows in some instances. Both 10-year bunds and
10-year JGBs have achieved record low yields for instance. The yield on U.S.
10-year Treasuries has traded as low as 1.62%, the lowest it's been since
February, when everyone was pretty sure there wasn't going to be a rate hike
anytime soon.
There has been talk about a $1 trillion corporate bond bubble in recent months,
but nobody seems to be talking about the sovereign bond bubble. Janus' Bill
Gross has noted that the amount of negative yielding debt has hit a record
$10 trillion, but nobody is talking bubble yet because countries able to
print their own currency (or are the biggest dog in the EMU) can in theory
generate as much debt as they wish . . .
— Janus Capital (@JanusCapital) June 9,
2016
...at least up to the point that that debt goes supernova.
What happens at that point? Everyone out of negative yielding bonds into
gold?
 A supernova is the explosion of a star. It is the
largest explosion that takes place in space. - source NASA
That would be interesting indeed. The gold market is
infinitesimally small relative to the global bond market. It would be like
everyone in the public pool on a hot August weekend suddenly trying to jump
into thimble.
The yield on a bond is supposed to compensate the investor for the risk they
are taking: Does anyone really think -0.159% accurately reflects the risk
associated with a 10-year JGB? A bond backed by a country whose debt burden
is 229% of its GDP . . .
Gold on the other hand provides no yield because the investor incurs no risk.
It is well and truly the safest of all the safe-haven assets; and yet at 0%,
it is now yielding more than $10 trillion worth of bonds!
Gold has no credit risk, no currency risk, no maturity
risk, indeed no risk of any kind. It is just gold. — Jim Rickards
The message here is to get a real
safe-haven — the protection afforded by real physical gold — before the bond
market starts going supernova. When investors in the bond pool realize their
haven offers no protection at all, demand for the yellow metal is going to be
out of this world.
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