The Market Is Drunk

The gold to long bond (30 year) ratio just crossed the 200 day MA today.  We have been watching this ratio for some time as it indicates how the market perceived the safety of gold vs sovereign bonds since both are considered safe havens.  A high gold to bond ratio is a sign of sovereign illness, rather than strength.

Note on the 3 year chart how this ratio has been climbing steadily.  We are double the rate we were in 2008.

If the ratio climbs above 10 again and stays there, we are in hazardous territory.  The last time we were in this nosebleed territory was in 1981 during a deep recession.  As the economy recovered the ratio declined - in other words bonds outperformed gold after 1981.  Then in 2002, the ratio bottomed out and began to climb during Allan Greenspan's tenure.

The danger, as I see it, is that if a more responsible approach is not taken with US finances soon, gold will continue to outperform bonds and we could see a surge of dollars into gold and a crash in the bond market.

If the bond market crashes, that will leave the economy with a terrible hangover.  The unspoken threat, is that a bond market collapse could also trigger a run on the dollar, leading to severe inflation (even though we are in a deflationary period currently).

This is the nightmare scenario.
A collapse in confidence in the US dollar.

Hopefully it never plays out.

Michael Burry Bets On Farmland and Gold

A Drunken Rowdy Bond Market