Why are US Bonds being sold?

Gold Survival Gold Article Updates:

August 22,2013


This Week:

  • More Gains for Gold and Silver
  • Have We Seen “the Bottom”?
  • A Tough Road to Hoe for the Fed
  • RBNZ Implements LVR Restrictions


More Gains for Gold and Silver

The sharp upwards trend in precious metals has continued this week. We have seen both gold and silver up again on a week ago. With the kiwi dollar weaker overnight following on from the Reserve Bank finally announcing the much anticipated Loan to Value Ratio restrictions, this has given the metals even more of a boost in NZ dollar terms.

Gold in NZ dollars is today at $1722.41 – up $60 per ounce from last week or 3.62%.

While silver has also jumped sharply to $28.95 per ounce from $27.02 – up a further 7.14% on a week ago.  So poor mans gold is up around 16% in just a couple of weeks.

As is often the case from lows the moves back upwards can come fast and high and take you unawares. The question now is where to from here?

Silver is well into overbought territory – somewhere it hasn’t been for almost a year! See the RSI indicator above 70 in the chart below. So it could be expected to see a pull back soon to around $27.50 or even to the 50 day moving average (MA) trendline (blue line) around $26. 

However gold isn’t quite into overbought territory yet and is not too far above the 50 day MA so it could run a little higher yet before a significant pullback.


Have We Seen “the Bottom”?

As always the real difficulty is in knowing if we have seen “the bottom” or not. In recent weeks we have shifted closer to thinking perhaps we have. However there are still a number of factors floating around that could keep precious metals weak for a little while yet so we are definitely sitting on the fence still.

These include potentially slowing purchases in India and China. The latest release from the World Gold Council showed massive demand in the 2nd quarter but it could be that these are slackening off now particularly on the back of the Indian governments multi-fronted assault on gold imports. In the long run smuggling and black market trade will likely make up for this but it could still have an impact in the shorter term and it’s unknown whether China will make up for any drop off. So far they seem to have though.

Also it’s unknown what impact the “taper” will have. Should the Fed actually follow through and surprise everyone with perhaps an even larger than expected reduction this too could have a temporary negative impact. We said a couple of months ago and that we think interest rates are the most important factor or rather real (after inflation) interest rates are. And in the short term real rates may remain slightly higher until inflation eats into them.

We just read this morning from John Mauldin that he thinks that the low-rate regime is what people should be paying attention to:


“The interesting thing is that if the San Francisco Fed paper is right [that the latest round of QE, massive as it has been, has not had all that much effect on the economy], the effects of tapering shouldn’t be all that large, and the far more important question concerns the level of interest rates. And on that topic the consensus seems to be clear: we are going to have low rates for a very long period of time. Indeed, it is that low-rate regime that we should be paying far more attention to than to tapering.” 


A Tough Road to Hoe for the Fed

However it is going to take some doing on the Feds behalf to keep interest rates low, as the big news lately has been the reduction in purchase of US treasuries by the USA’s biggest bond customers, China and Japan. 

Reuters reports we’ve just seen the biggest monthly dumping of Treasuries by foreign creditors since 1977. Just China and Japan alone sold a combined $40 billion of US debt last month and “June was the fifth straight month that foreign investors sold long-term U.S. securities, but the specific selling of long-term government bonds was the big turnaround as foreigners had bought $11.3 billion of Treasuries in May.” Source.

As Zero Hedge noted “the reality is that America’s creditors are saying goodbye just at a time when Bernanke is preparing to taper.”

This chart from Daily Reckoning Australia clearly shows Bernanke’s predicament. The Feds role in the Treasury market has been growing for the last few years while everyone else has been holding steady. And now it seems with the Fed talking of reducing it’s purchases a few of these “others” have been selling, hence rising interest rates of late. i.e. the rate of interest must rise to attract more buyers to make up for the sellers.

US Treasury Holdings


So investors face a quandary aptly summarised by Grant Williams who has been popping up all over the place lately and whose dry wit we always enjoy:


“What happens now? Do we get the dreaded taper, followed by a measured retreat in bond markets with equities stabilizing at all-time highs and central bankers having the world graciously bend to their will forever? Or do we get a taper that is accompanied by a big break lower in equity markets that causes one last panic-driven rush into sovereign debt, making things look optically OK for a little while longer? Or maybe we get a taper followed by a break in equities, a continued sell-off in bonds, and a panic into real assets like precious metals?

But there’s one more scenario that worries me: what if they taper … and everything falls anyway?

What then?”


What then indeed. Central Bankers are not going to have an easy ride in the next little while it seems. While we have no sympathy for them – unfortunately it’s the average guy who will take the hit. And the average guys still seems unaware that these Central Bankers are the cause of all the problems.

Case in point, Roger Kerr makes some good points about the benefits of decision making by an individual over a committee. This was in response to the Labour and Greens preference to changing the monetary policy responsibility of the RBNZ to the appointed Board of the Reserve Bank, rather than holding the Governor accountable as now happens.  

However at the end of the day this discussion misses the point. The problem is not who is making a monetary policy decision but rather that a decision is being made at all! The “price” of money should not be set by any one individual, board, or committee. The price of money, that is interest rates should be set by the market!


Speaking of Central Banks…

The Reserve Bank of NZ is also finding the going tough as they try to rein in rising house prices. Of course these are the same high house prices that they have caused with ultra low interest rates. But the average guy seems to have ignored that fact too.

The not unsurprising announcement finally came from the NZ Reserve Bank yesterday that “from 1 October banks will be subject to restrictions on high loan-to-value ratio (LVR) housing mortgage loans.”

The idea here is that restricting how much banks can loan to those with low deposits will stem the rise in house prices without the negative impact of a strengthening dollar, that would otherwise accompany raising interest rates. 

So they can keep stimulating on one hand via cheap money and take away with the other with lending restrictions. We think it might not be quite as easy as this as we’ve discussed before with the law of unintended consequences likely to have something to say about this central planner meddling.

Meanwhile in response the government has recently announced changes to kiwisaver rules and other government programs which will make it easier for first home buyers. 

The RBNZ makes it more difficult for first home buyers and the government makes it easier. Perfect sense!

Maybe the government and RBNZ should be singing from the same song sheet if they want to “solve” the “housing affordability” crisis? We have “solve” in quotations as we don’t think the government can “solve” the problem. See this article for some of our thoughts on housing affordability from last year. Housing Un-affordability: It’s Not Supply, It’s the Debt Stupid!

Actually it’s probably more likely they don’t want to “solve” the problem. As cheaper housing means lower prices which likely means mortgages underwater negative equity, bank failures and lots of unhappy punters which equals no votes.

So it will go on until it can’t – problem is we don’t know exactly when that will be.

In the meantime financial insurance remains cheap even after the recent run ups from the lows in both metals. We could see a period of sideways action in many markets for a while yet but in the long run how can it not end badly? Make sure you’ve got some wealth out of the system before it does.

1. Email: [email protected]

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Have a golden week!

Glenn (and David)


Ph: 0800 888 465

From outside NZ: +64 9 281 3898

email: [email protected]

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