A successful delivery

  • A reset point for gold investors
  • Unruffled
  • Sensitive to leverage

Expectant investors will be pleased to know that the Australian Office of Financial Management (AOFM) successfully offloaded $7.6 billion in government bonds to a bunch of suckers.

Have a cigar.

You’re probably among those suckers if you have any exposure to bonds in your managed funds.

The price the government will pay for this debt? A miniscule 3.27% per year for 30 years.

At that rate, if you’re interested to know, the government will pay $7.5 billion in interest to, ahem, lucky investors. That is, of course, on top of the $7.6 billion principal it must repay in March 2047.

Not that $7.6 billion in 2047 will be worth what $7.6 billion is worth today. If the government and Reserve Bank of Australia get their way and inflation runs at a constant 2% over that time, $7.6 billion in 2047 will be the equivalent of $4.2 billion today.

Now can you see why governments like inflation and low interest rates?

Markets

Overnight, the Dow Jones Industrial Average fell 200.38 points, or 1.09%.

The S&P 500 fell 26.93 points, or 1.24%.

In Europe, the Euro Stoxx 50 index fell 15.07 points, or 0.5%. Meanwhile, the FTSE 100 dropped 0.38%, and Germany’s DAX index lost 0.44%.

In Asian markets, Japan’s Nikkei 225 index is down 99.21 points, or 0.58%. China’s CSI 300 index is down 0.3%.

In Australia, the S&P/ASX 200 index is down 21.4 points, or 0.39%.

On the commodities market, West Texas Intermediate crude oil is trading for US$50.84 per barrel. Brent crude is US$52.53 per barrel.

Gold is trading for US$1,255.82 (AU$1,658.23) per troy ounce. Silver is US$17.55 (AU$23.17) per troy ounce.

The Aussie dollar is worth 75.74 US cents.

A reset point for gold investors

Our intrepid resources analyst, Jason Stevenson, has made it safely back from Sydney. He was there to attend the Precious Metals Investment Symposium.

From what he told me this morning, he had a cracking time. He’s looking forward to telling his subscribers all about it.

As you’d expect at a precious metals conference, there was a lot of talk about gold. No kidding!

And we’re sure the attendees and speakers weren’t short of an opinion or two about where the price is heading next. According to one expert analyst interviewed by Bloomberg, there’s a great outlook for gold:

Rising inflation and sagging confidence in the ability of central banks to revive global growth will drive up gold, according to Incrementum AG, which says bullion could climb to a record in the next two years.

Consumer prices are set to rise as oil rebounds, while low or negative interest rates and bond buying by central banks have failed to boost economies, said Ronald Stoeferle, managing partner at the Liechtenstein-based company, which oversees 100 million Swiss francs ($101 million). Incrementum was the top precious metals forecaster last quarter, Bloomberg-compiled data show.

It should be an interesting few weeks for the gold price. Investors are at a reset point regarding their attitude to gold.

For much of the past year, the gold price has climbed as investors felt that the US Federal Reserve wouldn’t increase interest rates. The rationale was that the economy wasn’t growing strongly enough, and that inflation wasn’t out of control.

In fact, as you’ll recall, the biggest (irrational) fear was that deflation would take hold.

Furthermore, some investors went one step further. They even thought it was possible that the Fed could roll out a new money-printing program. That surely would be good news for gold.

And so, the gold price gained 29% from the start of the year, through to the peak in July. Even after the recent fall, the gold price is still up 18.5% since the start of 2016.

But now, investors have to flip their view on gold. In a way, the latest arguments for the Fed to raise rates should be positive for a higher gold price.

As Bloomberg reports:

In a sign of rising inflation concerns, the difference between yields on 10-year U.S. notes and similar-maturity Treasury Inflation Protected Securities, a gauge of price expectations, has expanded to as much as 1.69 percentage points, the widest since May. The Federal Reserve targets 2 percent inflation.

Higher inflation expectations should mean a higher gold price. Not necessarily right away, but at some point.

However, in order for gold to rise, investors have to change their view on the risks for gold. For the past few weeks, investors have seen rising interest rates as a negative for the gold price.

Why? Because the theory goes that if interest rates are higher, investors will ditch non-interest-bearing gold investments, and switch to interest-bearing investments, such as cash or term deposits.

On the surface, it’s a reasonable argument. But as we pointed out last week, it assumes that most investors have bought gold simply because they’re not getting enough yield from cash.

We’re not so sure that’s true. For some, maybe. But we’d argue that investors (not including traders) buy gold and have bought gold because they see much bigger problems with the world’s money system.

We find it hard to believe that a quarter percentage point increase in US interest rates will be enough to offset those fears.

Again, we could be wrong.

Beside, even if the Fed raises rates by a quarter percentage point, where will the rate be then? That’s right, at just 0.75%. Would that be enough to entice folks out of gold and into cash?

We won’t pretend to be an expert when it comes to predicting the Fed’s (or any central banker’s) actions. Quite frankly, we find their reasoning and logic, well, unreasonable and illogical.

As for gold, we may not be an expert on that either. But, one thing we do know is that gold is gold. It doesn’t have an opinion on things, and it doesn’t try to guide or manipulate the market.

It just sits there…and does nothing. Now if only central bankers could learn from that, perhaps the world’s economy might be in better shape than it is today.

Unruffled

Our ‘mystery gold stock picker’ doesn’t appear to be ruffled by the recent dip in the gold price.

As he told me, while he has his views on where the gold price may be heading next (both short term and long term), his main focus is on finding cracking gold stock speculations that he believes could increase by many hundreds of percent in the coming months.

He’s already found a handful, and he’s showcased them to subscribers of our newest trading service, Gold Stock Trader. You can find out all about that service here.

Sensitive to leverage

Talk of an interest rate rise must surely be playing with the nerves of bond investors.

Investors in US Treasury Bonds did well earlier this year, as there were few prospects of a rate rise. Year-to-date, investors who bought 10-year or longer bonds are up 8.44% on their money.

That’s a neat return. It beats the 4.5% return of the US S&P 500 index.

However, with talk of a rate rise, October hasn’t been so good for bond investors. The return for the month-to-date on 10-year or longer bonds is -3.03%.

If you know bonds, you’ll know that longer dated maturity bonds are more sensitive to interest rate moves than shorter dated bonds. That’s because of the time factor.

If you hold a one-year bond, interest rates may not change at all in the duration of that bond. But if you hold a 10-year or longer dated bond, you could see multiple rate changes.

Other factors play into the rate sensitivity too, but time is important.

Why this is important is due to the generally leveraged nature of many bond investments. While a stock price can move wildly, bond prices tend not to.

For instance, over the past two months, The Walt Disney Company [NYSE:DIS] has moved in a range from US$91 to over US$97.

Apple Inc [NASDAQ:AAPL] has moved in a range from US$103 to as high as US$116.

Even the relatively lumbering International Business Machines Corp [NYSE:IBM] has ranged from a low of US$153 to a high of US$163 during the past two months.

That’s compared to the 10-year US Government Treasury Bond, which has ranged from just over US$97 to just over US$100.

To compensate for the relatively low volatility, and of course, the desire to increase returns, investors will leverage their positions, either through borrowing money to directly invest in bonds, or using leveraged futures contracts.

You likely don’t need me to tell you one of the consequences of using leverage when or if the market moves against you.

Of course, we’ll see how it all plays out. But just remember that interest rates have been at a record low for eight years. When interest rates are low, it tends to result in businesses making bad investment decisions…investment decisions that are easily hidden by low rates.

When interest rates rise, history shows that it’s much harder to hide those mistakes.

We’ll continue to keenly watch how all this plays out.

Join the masterclass

A quick reminder. Our latest trading masterclass has already begun. But it’s not too late to tune in to this educational series.

To register now, go here. Remember, this masterclass is free.

Cheers,
Kris