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Re: Gold Update: The small trade within the big trade
Sorry to return to this subject once more but with the potential for another period of turmoil imminent I've been racked with doubt about where to place a bit more capital. I'm not a wealthy investor, but thanks to you all at iTulip i've managed to protect what wealth I do have (so far).
Now gold at $900 is making me sleep badly but at the same time I can't find anything else that looks appealing. I entered the gold trade initially at $750 and against $800. So my question is really this; at this stage in the game should I be looking at more gold, gold stocks or something else (cash, etc)?
Thanks in advance for any advice.
Originally posted by FRED
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EJ writes in:
PMs tend to perform poorly in an an environment of rising bond yields and falling bond prices, and well during bond bubbles when inflation is running well above yields. At the inflection point of recessions, inflation tends to fall followed by yields. Bond yields have not been this low going into recession in more than 40 years.
The question is whether the current bond bubble, as indicated by a 2.5% spread between a year-over-year change in CPI and the 10yr bond, will persist until it reaches the level 5.5% spread experienced at the early part of the 1974 recession or will retreat as recession cuts demand and, presumably, inflation. Since the CPI understates inflation, the true spread is likely already in excess of the 5.5% level experienced before the 1974 recession.
Referring to the chart below, note that 10 year treasury bond yields tend to peak coincident with or soon after a peak in year-over-year change in CPI inflation early in recession. We expected a nominal GDP recession to start Dec. 2007. Perhaps it did, and we will not know for certain until revisions of the Q1 GDP numbers come out later this year, but unlike previous recessions since the 1970s inflation has been allowed to rise considerably in an environment of high energy costs and liquidity injected to fight the disinflationary impact of the credit contraction.
At this point in the current recession cycle, as indicated by the red outline, PMs at these prices make us nervous, too. However, the ongoing credit crunch, structural weakness in the dollar, and the steps governments are taking to counter these, including a flood of funds that continue to hold down bond yields, make us even more nervous. This combined with competition for constrained energy supplies has created a unique and uniquely treacherous investment climate.
The enormous bond market bubble gets far less attention in the press than the so-called bubble in commodities, now reaching hysterical proportions again as occurred during periods of rapid appreciation every year since 2004. Funds in PMs look at charts like the one above and worry. Old timers who were heavily invested in PMs during the 1976 to 1980 period who subsequently neglected to take the hint that a Fed pushing bond yields 9% over the rate of inflation is serious about fighting inflation, worry that a new Paul Volcker is waiting in the wings, ready to leap out at any moment and slam the economy into a disinflationary recession, sending commodity prices tumbling along with stocks. Our sources continue to indicate that the political will is not there, and as the credit crunch spreads and intensifies a policy of rising rates amounts to financial system suicide.
The Fed has been attempting to focus liquidity on specific credit markets, via TAF and other tools, to limit spill-over into commodity and other markets; this is as good as it gets. Meanwhile, it hopes that the recession will reduce inflationary pressures so that rate hikes are not needed, because they cannot hike rates.
All we can do at this point is keep watching for signs that recession is indeed lowering inflation expectations. It is with respect to homes and used cars, especially big ones, but the price of food and other goods affected by high energy costs shows no signs of abating. At this time a secular decline in inflation and bond prices, with a corresponding rise in yields, may be on the horizon but our Over-the-Horizon radar has not yet picked it up.
The question is whether the current bond bubble, as indicated by a 2.5% spread between a year-over-year change in CPI and the 10yr bond, will persist until it reaches the level 5.5% spread experienced at the early part of the 1974 recession or will retreat as recession cuts demand and, presumably, inflation. Since the CPI understates inflation, the true spread is likely already in excess of the 5.5% level experienced before the 1974 recession.
Referring to the chart below, note that 10 year treasury bond yields tend to peak coincident with or soon after a peak in year-over-year change in CPI inflation early in recession. We expected a nominal GDP recession to start Dec. 2007. Perhaps it did, and we will not know for certain until revisions of the Q1 GDP numbers come out later this year, but unlike previous recessions since the 1970s inflation has been allowed to rise considerably in an environment of high energy costs and liquidity injected to fight the disinflationary impact of the credit contraction.
At this point in the current recession cycle, as indicated by the red outline, PMs at these prices make us nervous, too. However, the ongoing credit crunch, structural weakness in the dollar, and the steps governments are taking to counter these, including a flood of funds that continue to hold down bond yields, make us even more nervous. This combined with competition for constrained energy supplies has created a unique and uniquely treacherous investment climate.
The enormous bond market bubble gets far less attention in the press than the so-called bubble in commodities, now reaching hysterical proportions again as occurred during periods of rapid appreciation every year since 2004. Funds in PMs look at charts like the one above and worry. Old timers who were heavily invested in PMs during the 1976 to 1980 period who subsequently neglected to take the hint that a Fed pushing bond yields 9% over the rate of inflation is serious about fighting inflation, worry that a new Paul Volcker is waiting in the wings, ready to leap out at any moment and slam the economy into a disinflationary recession, sending commodity prices tumbling along with stocks. Our sources continue to indicate that the political will is not there, and as the credit crunch spreads and intensifies a policy of rising rates amounts to financial system suicide.
The Fed has been attempting to focus liquidity on specific credit markets, via TAF and other tools, to limit spill-over into commodity and other markets; this is as good as it gets. Meanwhile, it hopes that the recession will reduce inflationary pressures so that rate hikes are not needed, because they cannot hike rates.
All we can do at this point is keep watching for signs that recession is indeed lowering inflation expectations. It is with respect to homes and used cars, especially big ones, but the price of food and other goods affected by high energy costs shows no signs of abating. At this time a secular decline in inflation and bond prices, with a corresponding rise in yields, may be on the horizon but our Over-the-Horizon radar has not yet picked it up.
Now gold at $900 is making me sleep badly but at the same time I can't find anything else that looks appealing. I entered the gold trade initially at $750 and against $800. So my question is really this; at this stage in the game should I be looking at more gold, gold stocks or something else (cash, etc)?
Thanks in advance for any advice.
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