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Monday, June 10, 2013

When the bond markets crash then gold and silver prices will go ballistic

You need to have some imagination to understand the bull market case for gold and silver. Not very much imagination, a little will do. The bears do tend to be traders rather than economists though we were saddened to see that Nouriel Roubini is about to trash his good name again by joining them (click here).

Perhaps in his case an innately pessmistic nature has just fastened onto the wrong negative. He thinks inflation is beaten and gold is no therefore no longer needed as a hedge. The Fed can print money until the end of time without any meaningful consequences. He will look right, of course, until he is hopelessly wrong.

Bond market bubble

Why can we be so sure that the bond markets of the world are going to correct or more probably crash? And as bonds are inversely related to interest rates that means much higher interest rates. Higher interest rates and higher gold and silver prices are hardly incompatible, by the way.

That is how we got to the peak precious metal prices of the late 1970s when inflation and interest rates hit the roof. We are not there yet. Gold would be $5,000 an ounce and silver $250 if adjusted for real inflation since then. But that is the whole point, that is where we are most definitely headed.

Take the UK, for example. Bond yields have recently dropped as low as 1.5 per cent. They have not been lower in 300 years, not even in the Great Depression. This just has to be a low, does it not? How much lower could it possibly go? So we will have the inevitable pull back in the reverse direction.

Follow the money

Where will all that money go, and don't forget government bond markets are the largest and most liquid of the global financial markets, much bigger than the stock markets?

It could go into cash but then if inflation is going higher then cash is not so attractive. It could head into equities, although it is far more likely that stocks will take a parallel fall as a high interest rate environment is hardly good for business profits.

No investors get corralled into precious metals as the ultimate financial bubble, the last in the series of asset price bubbles. Now the brightest investors, not very likely economists, like hedge fund managers George Soros and John Paulson know this and have made big wagers on it.

The problem is always timing. But as Baron Rothschild once remarked buying and selling early was how he made his fortune. Why not just buy and hold gold and silver? Realistically how far off can a bond market event be from happening?
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