When the gold price rises past a certain point, especially new highs, the bond markets start to fear. It’s not just because there is inflation out there, because they can price in inflation. Even tho the bean counters (bond – guys) who never create anything but just base loans on others assets, can price in inflation, if gold rises too fast they end up with a real pickle.
So before we continue, the thesis is that when gold prices rise worldwide like now, across the all the nations, there is no bond haven. At this point gold rising to new highs effectively means that the world bonds of all types (and this means all debts too even car loans and so on) are being discounted in real time. That scares the HELL out of bond traders and funds. And there is no escape either. They must be scared right now. Gold is likely creating a new higher low right now. People talk about the bond and debt swap markets and the chaos that is having on the sovereign bond markets. They will have a field day with this.
So, what do you do when you have trillions of bonds out there and you are a bond trader or fund, and you know this fact. You know there is no yield out there (another reason to discount bonds clearly) to bail you out. You have to sit on a pile of money and watch it being discounted in real time as or when gold makes new highs. Only the gold market can discount bonds in real time. There has to be several specific circumstances, but if those are met, which they are now, gold effectively is an instant world debt discount market. I am not merely talking about inflation here. I am talking several conditions that have to be simultaneously met.
This is mainly because the entire world is facing currency devaluation forces, and zero interest rates, and because all of them consider gold another currency and the best Central Bank reserves. As a bond fund, your only hope is to stay ahead of the information curve, which with the way networks spread information, and gold saying that bonds are worth right now perhaps a discount of a minimum of 25 pct. haircut across the board. That is as of now. How do I know that?
The information curve
The main issue here is that these funds have profited when there were interest rates around 6 pct. historically. They also profited from an information curve that they were ahead of before the new modern networks like the internet.
So when the bean counters had an information lead over the rest of us, and there were some positive interest rates, they could dominate the financial markets.
But all those advantages are gone now, today. So now big piles of money are chasing virtually no yield. Which means they must be discounted.
I’ll just say this. I made a prediction that in a year or so, gold will try and beat $2500 USD which we will look at from a math perspective as to how this will effectively discount in real time the bond valuations in everything worldwide.
Again, remember there is no haven with yield out there. The countries that have any real yield left are trying to lower their currency values to stop the rise and flight into their currencies, which makes their exports too expensive… just think about that. Exports mean profits which mean yield but let’s not digress.
When gold rises from an old high of $1800 like recently, to say $2200 what is the calculation in a world debt discount?
IF this rise is across all currencies, then, assuming the USD is used for the example, here is what we get. It’s really quite basic:
2200 divided by 1800 = 1.22
That is a 22 percent rise in gold’s price.
Depending on how you look at this, this means that bonds valuated in dollars for example have fallen in value by the same amount since the yields out there are effectively below zero, which means there is no way to cover the loss.
This means that every bond fund out there is worth now in this example about 20 percent less than it was before that new high. Of course those numbers fluctuate, but in the case of a large bond fund like Pimco with about $2 trillion to have to place in something with yield, it means for example that Pimco’s bonds are really worth in real time, like it or not, 20 pct. less. IE a Haircut. Gold does haircuts in real time. Not like in the sort of fake world where governments use the public treasuries (all now going bankrupt) to like act like a delaying action.
The fact of the matter is, in this example, a fund with a trillion or two of assets is effectively, in real time, devalued by any new gold highs or higher lows (higher ranges). And as I stated, the only thing the bond funds can do is try to push the governments to bail this mess out so they don’t take the haircuts. But…
‘We don’t want your money. Thanks.’
The fact that the world governments have pushed out $40 trillion of money (they say it’s ten but they are lying) to bail out every market on the planet since 2007 and gold is still rising kind of proves my point. Doesn’t it? The fact is…
We will see new gold highs probably this year, and being conservative, picking a new range of $2000 to $2500 for starters, will effectively scare the hell out of every bond fund on the planet. And every lender on the planet. And get this. At some point, funds won’t take your money. Then where will we go? Banks are already declining taking money, because they have no way to get yield. That is a scary development if you think of what the implications of that are. Eventually big bond funds will be seen as liabilities. Not the other way around (for one thing they are less nimble).
There is a lot more to say about this, and we cover gold, the USD the CRB and other markets and have made many major predictions ahead of time, I said ahead of time, in our 8 years of publication. Stop by and have a look.
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Disclaimer: Chris Laird is not an investment advisor/professional. This article, and the PrudentSquirrel newsletter, and alerts, are general market commentary only. They are not intended as specific advice. You should talk to your own investment professionals for specific advice. Information here is deemed reliable but should be verified by you if you think it’s important.
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