SD Outlook/Update: Markets have been in chaos, but there’s a strong argument to be made for an upside surprise in gold & silver…
Right off the bat, let’s throw up the chart that everybody is talking about:
No, that’s not Bitcoin, even though it looks like it.
That’s the yield on the 2-Year Italian Government issued bond.
Just two weeks ago, the yield was negative. Yesterday, the yield got to nearly 2.5%.
That is massive.
Think of it this way. I’ll use easy numbers, simple interest, etc, to make the point –
Let’s say you loan the Italian government $1,000,000,000 at a rate of -.5%. That means at the end of the term, the Italian government pays you back $995,000,000.
That’s the theft of negative interest rates.
But I digress.
Now, instead of loaning the government at a negative rate, you loan the Italian government $1,000,000,000 at a rate of 2.5%.
That meas at the end of the term, the Italian government pay you back 1,025,000,000.
Now multiply that one purchase of Italian bonds by millions of investors loaning billions to the Italian government, and you can see that the government’s finances are getting blown-up when going from paying a negative interest rate just two weeks ago to paying nearly 2.5% today.
That is essentially what is happening.
The Italian bond market is blowing up. Now it’s not just the Italian bond market, but that’s the one that’s made the biggest move in the shortest about of time. Italy is also the third largest economy in the E.U., so it’s not like Venezuelan bonds or Turkish bonds blowing up, but one of the countries that is a vital organ to all of Europe.
“But Half Dollar, what the heck does that have to do with us”?
One word answer: Globalization.
I know, that dreaded word, but it truly is an interconnected globally financialized world. In other words, it’s a global economy, and a global market. With travel and telecommunications making it all possible, and money does truly flow around the globe at lightning speed.
So let’s bring Italy into our markets now.
Because what is happening in Italy is affecting U.S. markets.
Let’s start with the US stock market. I’ve decided to go with the DOW:
One of the reasons is because the DOW closed below its 50-day moving average yesterday.
Yikes! Readers here know what that means by now.
Here’s the thing: Sure, the stock market is down so far year-to-date. I get that. But it has basically been on a 45 degree rise since bottoming in March of 2009. In other words, even with the downward price action this year so far, the markets are still up when you zoom out and look back many years.
What does that mean?
If markets are blowing up around the world, people will need to raise money, and you don’t get money out of a loss, you get money out of something you’ve made money in.
That’s why it’s a “profit”.
“So you’re saying the bond holders are losing money Half Dollar?”.
Because there are two things about a bond – the price of the bond and the interest rate it pays.
If you buy a bond paying a negative yield, that bond is expensive, but if yields shoot up and make a major move, the bond you bought at the negative rate loses money on the price of the bond. You see, Why would I buy a bond at a negative yield of, say, -.5% I can buy a bond paying 2.5%?
So who would buy that bond?
Nobody would (setting the “greater fool theory” aside for a moment) buy that negative yielding bond. And what happens if there are no buyers? The price drops until there are buyers. This shows the situation is especially bad because if all the sudden bonds are paying 2.5% when just two weeks ago they were in the negative, that would essentially take away every single buyer (were it not for central bank intervention) because it makes no sense to buy the negative yielding bond.
I know I’m all convoluted today, but this is important – It’s time we had a good talk about bonds.
Now, what does this have to do with the stock market sell off?
Well, if you have a negative yielding bond that you can’t sell because people rightfully prefer to buy the bond yielding 2.5%, those people are in a pickle.
They need to raise money for something, so what will they do?
They can’t sell their bonds.
Those bonds are essentially worthless.
But what has risen, basically at a 45 degree angle, since 2009?
Yup. The U.S. stock market.
So people needing to raise money, for whatever reason, have already raised it in the U.S stock market, so those same people will take profits now while the getting is good.
They get money from where they raised it to make up for the losses in the bond market.
Now there’s another force at play here too.
The U.S. dollar is a big influencer in the decision to sell U.S. stocks to raise money:
You see, the U.S. stock market is price in dollars, so not only have the prices of stocks gone up for the last nine years, but the dollar has been on one heck of a rally since mid-April, which means that its a double win-win.
A person gets to cash out of stocks with a profit, and since the dollar is strong right now, they enjoy the extra profit of cashing out for dollars instead of a currency that is weakening to the dollar.
See how the interconnections of markets work together?
Now, speaking just of the dollar now.
Look, I get it “There’s chaos all over the world Half Dollar, so people are making a “flight to quality” in the dollar”.
Institutional investors, strong armed by incentives and central bank manipulations, are at the time content on fleeing to the (ultimately wrong) “safety” of the U.S. dollar.
But the dollar is “overbought” no matter how you look at it.
And overnight we are seeing a pullback in the dollar, and it’s commensurate with a pullback (do I dare say “stabilizing”?) in the Italian 2-Year Yield on that first chart in this article.
Now, there’s one more dynamic to the interconnections of these global markets.
Behold the massive move of the yield of the U.S. 10-Year Note:
I drew the 3.0% – 3.1% channel just to show how far yields have fallen.
Why have yields fallen so much?
Again, it has to do with the emerging market chaos in general, and the Italian Bond Market in particular.
Remember, as people rush in to buy bonds, yields fall. Remember how I explained that earlier?
As the bond price goes up, the yield falls, as the bond price goes down, the yield rises.
So if people are rushing in to buy something, and I’m talking supply and demand here, so don’t think about the metals with this example: As people rush in to buy something, what happens with a fixed supply?
The price gets bid up.
That means, speaking of bonds, that the yields get smashed down.
Which we can clearly see in the yield on the 10-Year Note above.
“But Half Dollar, why are they buyin’ up the U.S. 10-Year Note”?
Again, it’s that whole “flight to safety”.
We know the dollar is ultimately dead, and the debt is no good as it will either be defaulted on or inflated away, so it’s really not “safety”, but that’s not how the world currently thinks or is strong armed into thinking by the Exchange Stabilization Fund and the Fed.
There will come a time when we look back and say, “what were we thinking assuming that U.S. government debt is the safest, highest quality asset to own”.
Well, you know what they say about “assume”.
It makes an “a$$” out of “u” & “me”.
And it will.
Which is why we stack gold & silver.
But I digress.
To recap: Global markets are blowing up and in utter chaos, so the stock market is getting sold off to raise funds, all the while taking advantage of a (bear) rally in the dollar, and this is also showing up in a “flight to safety” in U.S. Treasury debt.
Accordingly, it would be very, very hard for the cartel to justify a continuously fading VIX:
So with this global chaos and uncertainty we’ve got a mini-spike going.
Here’s a question: How long will it take for the emerging market crisis and the Italian government bonds in specific to come under “control” again?
People talk about the weeks it took for the “markets” to recover after the August 2015 scare, they talk about the days it took for the “markets” to recover after Brexit, and they talk about the hours it took for the “markets” to recover after the 2016 U.S. Presidential Election.
So again I ask: How long will it take before the Italian debt market comes under control?
Remember, it could take longer than thought because we have two interests at play – Italy, and the E.U.
So there is politics mixed into it, and frankly, we’re about to see just how much cooperation the dominant central banks around the world still have with each other.
So we’ll see.
But it is interesting to note, since were on the topic of market intervention, that the yield on the Italian 2-Year has pulled back overnight.
Moving on to commodities, well, they are just kind of in a wait and see mode.
Copper is right in it’s range of $3.05 – $3.10:
Which is where the price has been for weeks now. Geez can Silver Bugs relate to the pain of a channel like that!
Crude oil looks to be straddling its 50-day moving average:
That was a call I made a couple weeks ago which is turning out to be correct.
After falling for the last five days, it looks like oil will be bouncing today, and setting up a test at some point soon to regain the north side of the moving average.
Platinum has held on for dear life and has not fallen below the spike low of $872.40:
Remember: It would be uber-bearish for platinum to fall below that spike low. Platinum looks like it could roll here, so we’ll have to see. We also don’t want it to roll and put in yet another lower-low.
But if we get price action to the upside, albeit it would be a very weakly confirmed pair, we would have a higher-low and then a higher-high, and that would be what we call “progress”.
Palladium is riding its 50-day:
Remember what I said last week about palladium (and platinum)?
They are “strategic minerals of national and economic security” or however it was phrased.
This is bullish for the metals because it creates demand, could cause stockpiling and the removal of metal from the market, the metals are be vulnerable to supply disruptions, and all those other fundamental factors are at play with palladium (and platinum) that spell out “higher prices”.
So patience will be rewarded.
Remember – when the government gets involved, things become more expensive (except for gold & silver, but that’s because gold & silver are the mortal enemies to governments).
Stepping out of order, cause that’s sometimes how I roll, and to end with our beloved gold & silver, let’s talk events calendar next.
We see we are by no means out of the clear, and it culminates on Friday with the BLS Jobs Report:
In fact, we have market moving data every day for the rest of the week, and we have the Fed sticking their noses in everything to boot.
The question is – which is the bigger fish to fry?
All the economic data points and events this week, or the ongoing chaos in global markets which is now affecting our own markets?
Seems like they’ve got a little conundrum, and that could mean they make a mistake, and when the ESF and the Fed and their agents, otherwise known as the Cartel, make mistakes, good things happen to gold & silver.
We can see the gold to silver ratio is still clearly in its downtrend:
Sure, the GSR has had a bounce here over the last couple of days, but the trend remains in place.
I really do think the next move in the GSR will be lower, not higher, because after nearly half a year, once these metals get going, silver, in my estimation, will lead the way.
Looking at gold, we can see we’re trying to get back above the 200-day moving average:
We’ve seen pressure on gold over the last three days including the overnight/morning session, but the yellow metal hasn’t spent too much time banging below $1300.
Silver is where it’s been for most of the year:
I drew the channel at $16.25 to $16.75 only because that’s where my graph auto-scaled when I zoomed in on it, but you get the point.
We’re basically right smack dab in the middle of the range, if somewhat hanging around the upper-lower-bound.
Did I just say upper-lower-bound?
I guess I did.
Ok, so go ahead and say it: “Half Dollar, you called for a rally to start last week and you were wrong!”.
Uh, no, I wasn’t wrong, and I’m not back-pedaling either.
You see, we did rally last week.
But the Italian bond market crisis and general global market turmoil has changed things this week.
Markets are fluid like that.
Market information has an expiration date, and it’s not a “use by” or “best by” date but a hard expiration.
What made sense two weeks ago, no longer makes sense today.
I the Army we say, “adjust fire”.
So we’re adjusting fire.
Look, two weeks ago, Italy was getting paid to borrow money, and now their having to pay for the opportunity to borrow.
The world is really in financial turmoil right now.
“Ok, fine Half Dollar, you were right, but, why isn’t gold & silver rising in price now”?
You see, the stock market has gone up for nine years, and gold & silver have basically been in a bear market for the last several, with modest gains (comparatively speaking to the epic stock market bull run) since bottoming in December 2015.
There is a point here: Where international investors can sell their U.S. stocks at a profit to raise cash for perhaps, oh, losses on their bond portfolio, they also get the added benefit of a sharp rally in the U.S. dollar as an extra incentive to sell stocks to raise money.
Now, if there is no profit to be had in the metals, and there surely is not this year, then there is no incentive to sell because there is no money to be raised.
This is interesting.
Let me say it in a different way: Gold & silver aren’t going down, in part, because there are no profits to be taken from.
In other words, other than the manipulators, there’s no sellers right now.
Now to the part for why gold & silver prices aren’t rising?
Well, think Pavlov’s dog. Kinda, sorta.
You see, the big money is trained to trust the central bankers, when things go bad, big investors (pension plans, institutional investors, sovereign funds, etc) rush into the U.S. dollar, or to the U.S. Bond Market, and because the CIA controls the mainstream media in most of the world, and the ESF, FED and US-centric IMF run things in the background, there is this sense that has been instilled in investors that the U.S. market is the place to be and not gold & silver.
We know that’s the wrong thinking, but it is what it is.
Sorry for the overused cliche, but it is what it is.
These conditioned investors will ultimately figure it out.
Default, inflation, hyperinflation, deflation, and all of those dynamics are ultimately good for gold & silver.
We stackers have got it figured out first, and unfortunately, we’ve got to wait on the sheeple.
They will get it.
And eventually, they will catch “gold fever”.
And there is no fever like gold fever.
And as the smart ones begin to figure it out first (we’re the uber-smart who already figured it out), but I’m talking the smartest of the dumb masses now, when the smart ones start figuring this out, even as soon as the chaos in the global markets starts to calm and all these knee-jerk reactions that are panning out over the course of days run their course, I wouldn’t be surprised to see an upside surprise in the metals at all.
And long-term, of course, very very large upside, as in multiples higher.
But even with this latest bout of global chaos, we could still see the upside surprise because we don’t need to see many investors figuring it out, only a few smart ones.
And that could happen very soon.
As in it could begin this week as the global markets settle down, and the market begins to front-run the Fed, or it could begin in mid-June post-Fed.
But the continuation of this rally is still in effect.
I’m not even so sure this rally has actually ended.
And I still think my call for the rally, which was right, will see gold and silver continue to rally, even in spite of all the things that stand in the way of gold and silver price rises this week, particularly the surging dollar, the bid for U.S. bonds, the Fed and the BLS Jobs Report.
And if gold & silver do close the week in the green.
That would show a strength in gold and silver right now that is on the down-low, but very, very powerful.
Like a cougar lying in a tree, just chillin’, but ready to pounce on a deer with deadly force.
– Half Dollar
About the Author
U.S. Army Iraq War Combat Veteran Paul “Half Dollar” Eberhart has an AS in Information Systems and Security from Western Technical College and a BA in Spanish from The University of North Carolina at Chapel Hill. Paul dived into gold & silver in 2009 as a natural progression from the prepper community. He is self-studied in the field of economics, an active amateur trader, and a Silver Bug at heart.