Contrary Gold Analysis

An interesting view, and a conventional one, of the gold market follows courtesy of John Murphy of Stockcharts fame:

GOLD HURT BY RISING YIELDS AND STOCKS... Another market behind hurt by rising bond yields is gold. That's because gold is a non-yielding asset. As a result, it becomes a more attractive alternative in an era of falling rates which has been the case since 2000. Falling bond yields (and a weaker dollar) helped launch the bull market in gold starting in 2002 which lasted for nearly a decade.

 Conventional wisdom repeatedly claims that gold is a non-yielding assets and therefore stocks are a superior choice.

The author then explains that bond yields rising also take funds out of gold.  Yet the following chart says the opposite for most of the last 10 years (the exception being the last year or so).

What Mr. Murphy is missing, in my view, is a quality of gold that few other assets classes can mimic.

That is, a long term store of value.

Fiat currencies all over the world are supported by their respective bond markets as governments sell bonds to finance their social and capital spending plans.

While it is generally true that bond yields rise when economies are recovering and growth increases after a recession, there are cases when rising yields are a warning sign that the bond markets are losing confidence in government decisions and are demanding higher returns to offset increasing risks.

It is my conviction that with the Federal Reserve holding one third of all US bonds in its portfolio, that higher yields are destiny due to manipulation of the bond market by the Fed.  Once the bond market becomes fully aware of the repayment difficulty presented by massive American indebtedness, we could see yields rise quite quickly.

This is the point at which gold ownership becomes critical.  A loss in confidence in the bond market will drive bond prices down as investors look for a store of value.  The final store of value is precious metals.

While accounting tricks can make many stocks appear to be sound investments, one must be aware in disinflationary and deflationary environments, that stocks do not perform well.

We do not know when the gold market will finally turn up.  What we do know is the phony stock and bond markets will eventually have their judgement day.  

We also suspect that soon the US dollar will no longer be the sole reserve currency, due to the Fed and Treasury's insistence on steady dollar devaluation.

What replaces it is anyone's guess, but we believe gold or silver will be part of the equation to add stability to a new global currency system.