Through quantitative easing, central banks have bought their own government paper to push interest rates down. The question is how long we can expect this to continue. Because, just like with any situation - this one won’t last forever. So far, interest rates have held their lows pretty well but this will eventually change. When you look at both the present and history, it actually makes perfect sense, because the situation is so unsustainable.
PRLog - Jun 20, 2013 - LONDON, U.K. -- Interest rates are at, or close to, all time lows in many countries. Since the 2008 financial crisis stimulus actions coupled with ultra low rates have been vehicles for governments to keep the party going. Through quantitative easing, central banks have bought their own government paper to push interest rates down.
The question is how long we can expect this to continue. Because, just like with any situation - this one won’t last forever. So far, interest rates have held their lows pretty well but this will eventually change. When you look at both the present and history, it actually makes perfect sense, because the situation is so unsustainable.
As the graph below clearly shows, the 10 year U.S. Treasury Yield is at its lowest in a very long time – the lowest in over two centuries.
(See image 1 - Source: seekingalpha.com)
Funny thing about this is that the yields are so low – signaling low risk - when the U.S. never has been in greater debt – over $16 trillion in on-balance sheet liabilities.
Put another way. Today, the U.S. is the greatest debt holder in the history of the world. You would think that this should be reflected in the yield of government securities. But, again no. This is a direct result of central bank actions.
Apart from the money conjuring of central bankers there is another factor at play here. Ever since the 2008 financial crisis there has been a significant inflow into bonds, and an exodus from stocks – at least until quite recently. This is partly due to the fear factor, but also due to increased pressure from governments on investors to hold their debt.
(See image 2 - Source: GavelKal Data)
So, with all time – century - low interest rates and many investors, either partially or fully, invested in bonds we have the makings of the perfect storm for gold and silver bullion. The very real possibility of a parabolic rise in prices.
Why is that?
It may seem that governments can continue this charade forever but the music will stop playing eventually. In the not too distant future, they will loose control of their manipulation of interest rates.
With ultra low rates, investors will increasingly move from bonds into stocks, and as stocks start to perform even more money will flow into risky assets. This will lead to rising interest rates.
When it comes to the central bank stimulus, we are already seeing the waning effects of it in Japan today. The Bank of Japan is on an unprecedented stimulus spree to the tune of $1.4 trillion in two years. But bond yields still seem to be unraveling – going higher instead of lower. With a debt-to-GDP ratio of 250% and a whole 50% of the annual budget financed by debt, every single point increase in interest rates can have catastrophic consequences.
The reason why this is happening to Japanese rates is a loss of confidence – and the same thing will happen to the U.S eventually.
Just in the last month U.S. 10 year Treasury rates have gone from 1.6% to over 2%, which is a very big move in such a short period of time. There is no telling if this is the first sign of the unraveling or if we have a little while longer to go.
The end result of all of this is that inflation will ensue, with rising interest rates and a falling stock market. When this does happen it will happen quickly. You should consider adding to your precious metal holdings by buying silver bullion and gold bullion today, while they’re still available at attractive prices.
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The makings of a parabolic rise for gold and silver
June 20, 2013 at 08:51 AM EDT
