Bond market failure to push gold and silver prices higher

Analysts say the US will have to triple its bond issuance this year to meet the cost of federal bail out and stimulus packages, while in the UK the printing of money has sent 10-year gilt yields tumbling from 3.64 to 2.94 per cent.

The Bank of England’s move to quantitative easing by buying government securities to boost the supply of money is being closely watched by the US as a route it may follow shortly.

Now the lower yield on Bank of England bonds sounds an initial success, as bond holders will experience a rise in the capital value as the yield declines. However, surely the problem then is future bond issuance at lower yields. Will buyers want this low yielding paper?

Inflation returns

And surely the obvious problem ahead is that printing money inflates the money supply and causes inflation. And what is the asset class most likely to suffer from inflation? Why bonds with low interest rate returns that will quickly turn negative in an inflationary environment.

The rush towards the exit in the bond market could quickly turn into a flood, and into which alternative asset class will these bond refugees go? Cash will be little better than bonds if interest rates are low.

Indeed, your main investment criterion will be the preservation of capital value against inflation, not interest or yield. If the supply of paper money is rising then your only option is to shift to a foreign currency with a stronger and better managed economy, or buy precious metals which have a far more fixed supply and therefore do not suffer from inflation.

Precious metals

In today’s world of competitive currency devaluations there hardly seems a currency alternative worth considering, even the Swiss have been tampering with the franc. Your only real option is to buy gold or silver.

Thus as the bond market chokes from an oversupply of new paper and quantitative easing, the attractiveness of precious metals will grow. And given the narrowness and relatively fixed supply of the gold and silver markets the upward leverage on prices will be considerable.

In short any serious compromising of the bond market is highly positive for gold and silver, and an accident waiting to happen as government’s flood the world with debt. Of course when the bond market crashes that means governments will have to face economic reality and match expenditure with revenues, something likely to prove very painful.

US Treasury data showed that foreigners were net sellers of US securities in January, a worrying signal that all is not well in the bond market.