US Bonds on the Edge

The US bond market is teetering on the edge of the generational decline. Just as we have been hypothesizing about for nearly two years.

The 30-year US bond fell by nearly 2.3% this week, closing at 136.7.

Interest rates on the 30-year, which move opposite to prices, rose accordingly, rising to 3.4% per annum. This is not only the highest rate this year, but the highest since mid-2014.

Bonds are the ultimate paper promise. While cash in the form of US dollars is usable in the present, the only thing worse for an investor to hold in the high-inflation environment that we envision over the years ahead will be bonds. As bonds are promises for “dollars in the future.”

The beginning of a generational decline in the US bond market is a central component to our long-term precious metals thesis. When confidence in paper is lost, funds will begin to flow toward tangible assets. While commodities and land are also tangible, nothing else has the combination of durability, portability, and divisibility that make gold the ultimate real store of value.

Let us remember, the size of the government US bond market alone is $22 trillion. Total world debt is estimated to exceed $110 trillion. Meanwhile, all of the gold ever mined in the history of humankind is presently valued at $7.4 trillion. Can we thus comprehend the magnitude of the flow of funds that could soon be looking for an exit from paper-safety and into tangible-safety assets?

Updated Bond Charts

Let us turn to the charts: closing below 137. This puts the US bond just a fraction below the lower boundary of its multi-decade rising parallel channel which began in 1980 (magenta), as we see below:

Initial Bond Target

As can be seen above in the zoomed-in cutout, the 30-year bond now has a target of 116 (green), which is derived from a measurement of the amplitude (30) of the head & shoulders formation (blue “H”), and subtracted from the breakdown point at 146. This initial target will correspond with interest rates in the 4.8% – 5.0% range.

Note, that this target matches with the multiple bottom tests seen between 2008 – 2010 (black dashed lines). When multiple technical levels reveal a similar target, that target takes on the increased likelihood of being achieved.

While this target is already triggered, because the target implies a breaking of the 38-year channel (magenta), we must expect that the existing trend will offer some modicum of support before breaking. Technical-based buyers should be entering the bond market immediately. In order to begin offering support, as they have every several years since the 1981 low.

We thus expect that a rally will develop in the bond market first. Most likely taking it back into the broken support zone near 146 – 147. Then with an outlying chance of piercing into the right shoulder of the top formation (“R Sh”, blue) before the subsequent decline results in a final breaking of the 38-year channel (red arrows).

What if the Channel Fails Immediately?

We expect large sovereign wealth funds and multinational banks to now enter the bond market and provide support. However, what would happen if they fail to show up and the 30-year slices through its lower channel boundary without a final bounce?

Such would indicate a “black swan” type of free-fall collapse for bonds. Something which has not been witnessed in modern US history.

The percentage decline in bonds should such an event occur would take most people by surprise. Can we imagine the 30-year moving from 3.4% to 5.0% within two weeks? This is what will occur if the channel breaks now without a bounce.

The quick rise in interest rates would impact everything from government borrowing to mortgage rates to the ability of corporations to refinance debt. The rise in rates would likely trigger a significant sell-off in US stocks, as we saw in February (see PMI Issue #103).

Bonds are immediately testing the lower boundary of their support. Because the consequences of a bond failure would be so severe, we always recommend that investors hold a core of physical gold, no matter what our short-term outlook may be (see previous articles). We live in a time of unprecedented over-valuations in most major world markets. Therefore, no one should be without an insurance policy in this day and age. [Beyond the insurance holding, larger purchases can wait for higher-probability timing.]

After Breaking the Channel

Upon a breaking of the channel, there should be no question that a bond bear market has begun.

At that point, the big picture macro fundamentals will have begun to swing into motion for a precious metals bull market.

Still, as we know, markets can move contrary to what the fundamentals would imply for some time. That is why we will not take it for granted. That a falling bond market will cause a rush into precious metals immediately. Indeed, over the short run, we must be open to the idea that the Fed may continue to persuade market participants to funnel this cash into already-overvalued stock markets.

We must continue to evaluate each market on its own accord. Assumptions can lead to dangerous conclusions in the financial world.

Takeaway on US Bonds and Gold

A generational top in the US government bond market is on the doorstep. Still, let us evaluate the gold market on its own at regular intervals, should there be any delay in the tidal wave of funds which will be searching for an exit over the next several years.

CHRISTOPHER AARON

BULLION EXCHANGES MARKET ANALYST

Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency.

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.