sunshineprofits.com / By Przemyslaw Radomski, CFA / February 8, 2013, 11:35 AM
In our previous essay we stepped back from the day-to-day price analysis in order to focus on the major event that happened recently on the silver market (the silver – JP Morgan manipulation lawsuit was dismissed) and today we would like to get back to the recent price moves, however, first, let’s discuss the current situation on the bond market.
A trend is a trend until it stops. Could this be the case for bonds? Is the bond bubble about to burst? And if so, what are the implications for precious metals?
Anyone following the financial press can see that analysts are rumbling that bond prices will fall when interest rates rise and that it will happen sooner than later. And we generally agree – you can’t lower interest rates below zero (who knows, maybe the Fed will surprise us calling that anunconventional but necessary move?) and since they are practically there, the ceiling is very close to the current bond valuations. The reason that bonds beat stocks over the past two decades is that interest rates have plunged making attractive the fixed income that bonds promise to pay. But the situation might as well change in the following years.
“Investors should be alert to the long-term inflationary thrust of such check writing” by the Fed, said Bill Gross, who runs the world’s largest bond fund, in his January investment outlook. “While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the ‘out’ years towards which long-term bond yields are measured.”
Nearly 40% of the 32 investment strategists and money managers surveyed recently by CNNMoney think that interest rates will begin to rise in 2013, and another 30% say the shift will begin in 2014.
That would be even sooner than the Federal Reserve’s projections. The central bank doesn’t expect to raise the federal funds rate, the key interest rate that influences overall interest rates, until some time in 2015. The Fed said that it will keep its stimulus policies in place until the unemployment rate falls to 6.5%, which it doesn’t think will happen before then. But whether that takes place this year or next, or in 2015, one doesn’t want to be stuck with major investments in bonds when it happens.
Waves come and go. The current bull market in bonds must end at some time in the future, sooner or later, not until inflation or interest rates rise. So far, the economy remains sluggish, real unemployment is high and inflation is minimal. But, sooner or later, investors will experience either a loss of money, or at best meager returns. If inflation eats away the value of bonds, those who hold gold in their portfolios may be able to compensate.
Let’s see how gold is performing this week. Let’s begin with the analysis of the US Dollar Index as it will likely have a major impact on the price of yellow metal in the coming months. We will start with the long-term chart (charts courtesy by http://stockcharts.com .)