US bond market, next shoe to drop!

Watch out for the next twist in the unravelling of the global financial system this week. In several previous articles I have alluded to the danger of a collapse in the US bond market, particularly as the cash being pumped into support the banking system is highly inflationary which makes a mockery of the returns available on fixed coupon bonds.

But whereas I had thought this problem was months away, this whole crisis is developing much faster than anybody imagined possible. I can only concur with these following paragraphs from Adrian Douglas writing on www.goldseek.com today:

“Ominously the bond price has made a pronounced double top and is looking ripe for a collapse. As the stock market had its worst week in history the financial press reported on short term treasuries rallying as the initial reaction of investors was to rush into “safe haven” treasuries. The 10 year note tells a different story. It initially rallied on Monday October 6 to 118 but by the end of the worst week in stock market history it had fallen to 113.5. Hardly indicative of a safe haven play!

All the bailouts and “recapitalization” plans of the Treasury and the FED are highly inflationary and require issuing massive amounts of Treasury debt. The bond vigilantes are waking up. They are going to dump bonds like they have gone out of style. Bond prices will drop like a stone, general equities will drop more and the dollar will nose dive.

This highly inflationary scenario will make money rush into the tiny precious metals market and explode their prices due to paltry supply. The lack of supply of the metals will mean that money will have to spill into anything silver or gold such as the mining equities. Money will also flow back into commodities because the money leaving the bond market and the equities markets will be just too large to be accommodated anywhere else.”

$1,200 gold

So there is yet another reason this week for precious metal prices to spark sharply higher. Gold has gained $200 an ounce in the past month to top $930 but options are pointing to $1,200 by the end of the year, and another $300 looks just the start of its upward rise. Silver will also follow its precious brother higher as poor man’s gold, and as its supply is far more restricted the upside will be greater.

Time is running out to position for this exciting up leg in the bull market for gold. Last week we saw a dramatic collapse in global equities. This week I would not rule out a dramatic leap in gold and silver prices driven by a bond market collapse which is going to leave people in tears.

This really is uncharted territory – except that a look at the bond chart tells you all you need to know. Some modest asset allocation to precious metals, and away from bonds would look a very wise course of action.