Posted on 30 June 2013 with 4 comments from readers
Gold and silver have been first in line in the sale of the century but plenty of other assets will have to be sold down to meet upcoming brokerage margin calls.
Just to take Dubai bonds as a microcosm. Bond yields have jumped and prices fallen since Fed chairman Ben Bernanke hinted about monetary tightening. Local bond brokers have tightened margin requirements and demanded more cash from investors holding margin positions in bonds.
Meeting margin calls
How do they pay them? Well they have to sell something else. That’s how you get a downward spiral in financial markets. It is leverage working in reverse as the debts have to be paid by liquidations.
Market players have dumped their precious metals first. The selling by these guys is probably over and they are all out of gold and silver. Now they will have to move on to selling something else.
The problem with this downward spiral is that once it starts it is hard to stop. Each lurch downwards in prices is followed by more margin calls which are followed by increased selling and so on and on.
Hedge fund managers and other large traders seem to have been reluctant to sell equities because they have done so well in this market recently and so concentrated on selling precious metals first.
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It must be the bond markets that are now threatened with a downward spiral next. Indeed, this is already happening. Ben Bernanke did not actually say he was going to raise interest rates. It was the merest hint that it might happen in the future if the economic data allowed! Bond markets did the rest.
T-bonds yields surge
Interest rates on 10-year US treasuries have shot up by 50 per cent to 2.5 per cent since May 1st. Remember the bond price moves in the opposite direction to interest rates. Bondholders are in deep trouble here.
What happens next? Basically the Fed is losing control of the asylum and no longer sets interest rates. The bond market sell-off will gather speed and margin calls will accelerate the fall to the downside. Forgive ArabianMoney for being parochial but that’s what is happening in Dubai today.
Now what where will all the money from a bond market liquidation go? Equities hardly look attractive in an environment of rising interest rates. No if past history is any guide then this torrent of cash will be directed into the tiny precious metals market and result in a huge inflation of gold and silver prices.
That’s not exactly what most pundits are saying now but they are just trend followers and have not done their macroeconomic homework. Start now by subscribing to our sister monthly investment newsletter and start winning against the downturn (click here).