What the US Bond Market Suggests You Do

What are the share, precious metal and bond markets trying to tell you about what lies ahead?
Is silver being ‘the canary in the US recession mine’? On April 29 2011, the price of silver hit an intraday high of nearly US$50 per ounce.

It’s been downhill ever since. The silver price is currently trading around US$19.40 per ounce, representing a decline of 60% over the past three years.

Since 1970, the US has experienced seven recessions. Each one of these recessions has coincided with a fall in the silver price. In fact, silver’s four major price crashes have all occurred during recessions (1973, 1980, 1982 and 2008).

The quantitative (pure numbers) data from the US indicates a recession has been avoided. However, the qualitative data — unofficial employment stats, weak retail figures, auto industry being supported by sub-prime auto loans, anaemic GDP growth figures in spite of unprecedented stimulus efforts — tells a story of an economy struggling to stay out of negative territory.

The common belief is that precious metals are a safe haven in times of economic difficulty. However the data tends to indicate gold and silver prices appreciate more during times of economic expansion rather than contraction.

An expanding economy generally creates higher levels of inflation, and precious metals act as a long term hedge against inflation.

With the debt laden developed economies mired in ‘barely there’ growth, perhaps silver’s price decline is once again proving to be an indicator of deeper recessionary or even deflationary times ahead.

The US share market obviously does not match this outlook. The S&P 500 index went to the record-breaking level of 1900 points on May 23, 2014. Perhaps this march to higher highs has more to do with free-and-abundant-money chasing yield than it has to do with economic fundamentals. Time will tell.

Another situation worth watching is the decoupling of gold and silver. In 2011, the gold price continued to rise while silver was falling. The gold price reached its high of US$1890 per ounce on 22 August 2011 and since then has fallen 30% in value (compared to silver’s fall of 60%).

Interestingly this decoupling in price activity also happened between March and December 1974. In the following 20 months, gold made up the lost ground and fell nearly 50% in value. If the deflationary forces that are gathering momentum in various parts of the globe prevail, then gold just may repeat its mid-1970s price collapse.

The US government issues Treasury Inflation Protected Securities (TIPS). These investments are indexed to rise with the Consumer Price Index (CPI) to protect investors from the eroding effects of inflation.

The bond market (the professional money) determines the rate of return on TIPS. In the more dynamic 1990s, 10-year TIPS averaged a real return of 3.5%. At the start of the 2000s, the bond market accurately forecast the US would suffer sluggish growth over the next decade and the real return on TIPS fell to 2%.

What is the bond market forecasting for the next decade? The real return on current 10-year TIPS is 0.34%. The professional money clearly believes the US’ anaemic economic situation will continue for many more years.

The precious metals and bond markets are issuing warning signs prudent investors should heed. There appears to be a disconnect in the messages being sent by these markets and what the share market is actually doing.

For those who have participated in the share market’s five-year rally, in my opinion it would be wise to consider re-weighting your exposure to shares to a lower level. What is an appropriate level? That will depend on your risk tolerance and your ability to withstand a market shakeout every bit as nerve-racking as the GFC period.

The Gowdie Family Wealth portfolio is 100% cash at present. The prospect of a share market correction in the order of 60+% is way outside our risk tolerance level. While this asset allocation may appear overly cautious, nearly 30 years in the investment industry has taught me there are times to be brave and times to be less brave.

There is no real substance in the US market’s rise to record highs. To test the veracity of this statement ask yourself whether the US share market would be where it is today if the Fed had not intervened with suppressed interest rates and QE.

The answer is a definitive NO. The artificiality of the share market must at some stage manifest itself in either a prolonged period of price stagnation or a massive correction. Markets don’t do stagnant very well, so my money is on the latter.  Now is a time to be less brave — at least that’s what the precious metal and bond markets are telling me.


Vern Gowdie
for The Daily Reckoning Australia

From the Archives…

When Nobody is Responsible for Your Retirement
23-05-2014 – Nick Hubble

Join Markets and Money on Google+

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

To read more insights by Vern check out the articles below.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money