Bonds Lead, But Gold & Silver Will Follow

Years ago, 16 to be exact I was reading a book by John Murphy (the god father of technical analysis). And I read something that has always stuck in my mind. He said that the price of bonds typically lead trend reversals in the stock market.

Taking a look at the chart below, you will notice that both the price of bonds and the price of gold have started to show signs of strength even though the US stock market continues to rise. This is telling us that the big money players are slowly rotating their money out of stocks. This is exactly what the intraday charts of the indexes and volume have shown us in the last couple months (distribution selling) also. Smart Investors are starting to rotate their money into the safer havens like bonds, gold and silver.

The treasury bonds market is one of the longest running bull markets in history. I do not recall any other asset class to have sustained a bull market for over 33 years.  The charts below shows this massive rally and also the new short term rally which will last for several months.

The longer a trend lasts the stronger the correction will be usually.
The question:  What will cause the bond bull market to break down and go into a bear market?

Made in China

China is likely going to be the cause of next major financial crisis in the United States. China is the world’s largest consumer of gold and are also the largest holder of US Treasury Bonds.

Chinese U.S. Treasury holdings plunged the most in two years, after China dumped $48 billion worth last year. This was the second largest selling spree of bonds by China in history and makes me wonder if it is the start of something much larger…

China’s Motives to Sell U.S Treasuries:

China is the largest holder US bonds for a good reason… Bonds have been in a 33 year bull market providing steady gains on their investment. But China is likely to start dumping more and more treasury bonds because everyone knows that all bull markets eventually come to an end.

Also if the U.S starts to raise rates later this year or 2015 it will hurt the price of bonds dramatically and help drive bond prices lower and kick start the bond bear market. It only makes sense that China will increase their frequency of selling the bonds to lock in gains and reduce losses on the more recent bond purchases.

With the potential of hundreds of billions of U.S Dollars China will have from the sale of bonds they will likely diversify and accumulate gold.

Bond, Gold & Silver Conclusion: 

The U.S stock market remains in a bull market, but is showing signs that it will likely top and roll over in the next 2-6 months.

Investment capital is being put to work in the bond market and is slowly trickling into the precious metals market. While bonds have been moving higher for a few months, gold, and silver continue to struggle to find a bottom. Because gold and silver are more volatile and manipulated it will take more fear of the stock market topping out to induce buying of these risk off assets.

Looking forward a few years in bonds and interest rates, I do feel the price of bonds will be substantially lower for a long time and for interest rates to rocket higher and faster than most are predicting. This will be a huge opportunity for those who understand how to invest during bear markets and uncertainty.

As always, I take my trading and investing one day at a time. I am not bias towards the market I simply adjust my outlook and positions as needed.

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Chris Vermeulen