2018-02-12 Week - Gold - Bonds - Millennials

This Week

Dudley will be blaming the market correction on his predecessors as he is left holding the bag from Bernanke money printing and Yellen status quo. One week in, and it already looks dire. After a year of new policy and directions, it will be much worse.

This week data is weak. Expect that most moves will be broad through markets without a clear catalyst until after the event.

30 Something Traders

Traders under 30 have never seen a real function market. They have learned to trade in a market that has steadily climbed (BTFD, Sell Vol, etc). They are accustom to HFT spikes and used to the PPT pumping Vix to save the S&P (broader markets). They have never seen what a massive selloff in the market looks like.

This week, they got a small taste. The pullback in S&P and DOW (followed by contagion to other markets), was said to be brought on by VIX short squeeze. The rule of thumb for trading VIX is you win 30% of the time. So without a good reason, most traders avoid the VIX.

When a slot machine is paying, everyone wants a taste and that was the VIX. However, the casino always wins, so it should be expected that all of the gains were whipped, plus interest. Anyone surviving in markets could have told these 30-somethings that this is how markets work, but who listens to advice with dollar signs in their eyes?

Now, central banks are pulling back from market manipulation by tapering and exiting Quantitative Easing programs. That means that markets will have to stand on their own. That means that markets will have to fend for themselves. However, after 10 years of easy money, withdrawing that money will be like a heroin addict going cold turkey. There will be vomiting and cold sweats. There will be monetary intervention (going off the wagon), followed by more vomiting and cold sweats.

Stock markets are moving lower. They may stabilize, but those moves will pale in comparison to the long term down trend. BTFD is over. Now is the time to save any winnings by hedging against the fall.

For 30-something traders, this may be crypto or tech. Crypto has surprised millennial who have just realized that investments can go down (soon to boom again). Tech is going to stagnate as money evaporates from the system. 30-Somethings don`t have a lot of experience with bonds, gold or commodities, but that is where the money will soon be made. Markets are repetitive, cyclical and predictable (on longer cycles), and the cycle has just reversed. Good luck Millennials!


Bond yields are spiking higher making bonds more attractive. Recent auctions have shown that demand for US debt is down, forcing higher rates. A wash of new debt will drive yields even higher.

What good is 2.5% yield versus currency dropping? Not much. The US Government is printing money (issuing debt) and has effectively raised the amount of debt it can generate. So they will be pumping the bond market full of paper. This wash of new bonds will drive the yield higher (bond selling and issuance is inverse to the yield).

If US T-Note yields hit 3%, there will be a mass rotation out of stocks into bonds. High yields are attractive to long term investors looking for stable incomes. Bond yields over 3% is considered better than most stock dividends without the fear of a dipping stock market. Because stocks have a high probability of a 10% pullback in the near future, investors hedging will shift to bonds. For risk adverse investors, this means it is a good time to sell stock and take a guaranteed yield in bonds (most ignore currency failures when hunting yield).

Most stable markets consider 2-3% yearly inflation to be good. The USA aims for a 2% inflation rate, but will often hit around 2.5% or higher. The Fed is looking to taper (increase inflation), which means the REAL rate could be much higher than bond yields. So the idea that 10 year notes (not TIPS - which is not the REAL rate) would be near breakeven versus inflation, makes them attractive to some investors. This may mean that bonds see an inflow from investors dumping stocks.

Bond yields at low rates are useful in a money-tightening environment, but the money supply is NOT tightening. The Fed is not actually tightening the money supply by withdrawing supply. Their plan is to allow existing instruments to expire as opposed to direct market intervention. They expect to raise the funds rate (benchmark for credit) later in the year, which will curtail some of the loose money in the system. That will not actually create a more valuable dollar. At current bond yields, the dollar is more likely to devalue by a greater percentage than 10 year note yield. It is a sucker`s bet.

Looking for yield in high-yield bonds (junk bonds) is also a poor choice. As markets pullback, failures in markets will create a contagion in the high yield space. Corporate bonds will follow their underling in companies. Municipal bonds will follow the inability of government to pay debt (more inflation is less revenue to generate tax which is less money to pay debt). That will likely prove why this space is known as Junk bonds.


It is not too late to hedge with gold. Gold buying has been limited this week because many of the traders in markets are too young to remember that gold is a hedge against uncertainty. It is not really uncertainty as much as a strong certainty that stock markets will drop. As traders look for safe havens to try to skim yield, expect that gold prices will again move higher.

Gold generally follows a 20 year (roughly) cycle. This is partially due to the time it takes to get new production online. Gold mines are a time, money, and paperwork intensive venture. They don`t happen overnight (unlike crypto ICOs). Gold producers do extensive research as to the potential for yield on locations. Only when a location yield is sufficient to warrant production (by estimating future prices versus production cost) do gold mines go forward. Many existing mines have continued production through stagnant prices because their cost of production was still well below the $1250 level (price of their sold futures contracts).

If you are looking for a long term growth of value in a market, look to gold shares as a place to put some of your portfolio. A gold company with good management and good mines will soon be outperforming the broader markets, as they did early this century (2000 to 2010). If you can get a good entry price, then you win on Return On Investment (dividends) as well as share price. Some of these companies are even paying better than bonds while share prices hover at the lower level.

For a quick example:

Ticker - PE - ROI

ABX 7.2 11.69%

AUY 00 -4.17%

GFI 31.3 2.16%

GG 21.7 2.5%

HMY 31.2 1.03%

KGC 45.4 1.45%

NEM 54 -2.36%

RGLD 53.3 3.04%


YOU ARE AN ADULT and must make your own decisions. ONLY YOU know what level of experience you possess. ONLY YOU know what level of risk you are willing to take. ONLY YOU know what your financial goals are, and to what lengths you are prepared to go to meet those goals. You will be the one to wear your losses, so trade with caution and do your own research.

Henry Ledyard is an independent trader. He has NO affiliations with banks, brokerages, funds, trading houses or markets. He trades for himself and posts trading ideas merely to share information. He does NOT want your money, advice or opinions. He does NOT want your unsolicited emails. If you require further financial advice, seek it elsewhere. Henry`s opinions should be considered as addled as his blog site: