Saturday, November 14, 2009

What Does This Chart Mean?

Following is a one year chart of the yield on the 1 year U.S. Treasury bond:

The yield on this relatively short-term instrument of perceived safety (in the minds of paperbugs) is now lower than it was during the Great Fall Panic of 2008 and it is now at its lowest point in over 50 years. This is a deflationary warning signal. This is a market set rate, which means people are buying this bond hand over fist in search of - well, what are they in search of? It can't be yield. Perhaps they are interested in benefiting from currency appreciation due to the strong Dollar policy of widdle Timmy Geitner (hee hee).

This chart is all about a move into perceived safety. The bond market is bigger than the stock market. Big money continues to stampede into short-term U.S. Treasury debt. Some of that money, now that the yield on short-term debt is basically zero, has been moving into Gold for safety instead. It doesn't take a lot of money to move the Gold market - it is a small market relative to the global government debt market. Yes, there are speculators/hedgies/retail investors chasing the Gold market higher, but they (we?!) are the price takers, not the price setters.

I think this bond yield chart is signaling that another deflationary wave in most asset prices is coming soon (I know, I know, I've been waiting for it since May). This would drag real estate, general stocks and corporate bonds down another notch in nominal price as reality comes back to these markets and hope of recovery is destroyed. As a Gold and Gold stock bull who is not currently bullish on commodities, I welcome another round of asset price deflation in Gold terms (because Gold is my cash holding and thus such a scenario increases my wealth by increasing my purchasing power). I think the nominal Gold price will hold up much better this time around if another deflationary asset price wave hits. Such a scenario would set up higher profit margins for Gold miners going forward as the costs of mining drop further relative to the price of Gold.

Such a scenario would demoralize the peak oil crowd, paperbugs and weak Gold holders alike over the short to intermediate term. And yet, such a scenario would also set the stage (after a multi-week correction) for a raging Gold stock mania that should be coming soon to a theater near you (it's not a question of if, it's a question of when in my mind). Just food for thought when thinking about what might happen next in the markets...

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