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Miraculous Credit Spreads – Precious Metals Supply and Demand

Summary:
Running From “Risk-Free” to Not So Risk-Free Debt  The price of gold blipped last week, while the price of silver was unchanged. Speaking of interest rates and central planning by central banks, we note that in mid-2016, a correction (counter-trend move to the main trend) began in 10-year bond yields. 10-year treasury note yield vs. 10-year German Bund yield over the past decade [PT] It occurred at the same time in the Swiss government bond and the US treasury bond. Also the German Bund, the British gilt, and the Japan government bond. Americans, living in a bubble of our own making, think the Fed is printing dollars to infinity, therefore inflation, therefore higher rates. The proof that this view is wrong, is that the same move

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Running From “Risk-Free” to Not So Risk-Free Debt 

The price of gold blipped $13 last week, while the price of silver was unchanged. Speaking of interest rates and central planning by central banks, we note that in mid-2016, a correction (counter-trend move to the main trend) began in 10-year bond yields.

10-year treasury note yield vs. 10-year German Bund yield over the past decade [PT]

It occurred at the same time in the Swiss government bond and the US treasury bond. Also the German Bund, the British gilt, and the Japan government bond.

Americans, living in a bubble of our own making, think the Fed is printing dollars to infinity, therefore inflation, therefore higher rates. The proof that this view is wrong, is that the same move occurs all over the world at the same time.

At the same time, an extraordinary thing is occurring in less-watched spread. Corporations with a credit rating that’s below investment grade should pay more to borrow than the risk free bond. How much more? This is a spread, and the St. Louis Fed provides a convenient graph of it.

Option-adjusted US junk bond spread (option-adjusted=adjusted for first call dates). These bonds remain in demand by yield-seeking investors on the slightly adventurous idea that the US economy is so strong that defaults are highly unlikely regardless of the how high the pile in corporate debt becomes. In fact, the trend in credit spreads is diverging to an unprecedented degree from the surge in net corporate debt (and the associated surge in debt/EBITDA ratios). Investors are probably overestimating the ability of low-rated corporate debtors to continue to refinance their debt without a hitch. Sooner or later, a negative surprise or two will upset the current happy state of affairs. [PT]

This spread has just broken down to a new post-global-financial-crisis low. So we are going to have inflation, and you better trade your risk-free bonds for junk bonds issued by zombie corporations? Do it quick before inflation and rates really rise!

Fretting about the government’s ability to pay the interest in rising rates, they buy the debt of corporation who already couldn’t pay the interest prior to rates going up?? Clearly, here is a rotation out of government bonds, based on whatever story. Which does not need to be a true story, or even consistent.

And the gold community wonders why the gold price action doesn’t seem to make sense…

Fundamental Developments

We will look at the supply and demand fundamentals of both metals. But first, here is the chart of the prices of gold and silver.

Miraculous Credit Spreads – Precious Metals Supply and DemandGold and silver, priced in USD

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). It rose this week.

Miraculous Credit Spreads – Precious Metals Supply and DemandGold-silver ratio – moving back up a tad

Here is the gold graph showing the gold basis, co-basis and the price of the dollar in terms of gold.

Miraculous Credit Spreads – Precious Metals Supply and DemandGold basis, co-basis and the USD priced in milligrams of gold

The price of the dollar dropped slightly from 26.1mg gold to 25.9mg (i.e., the price of gold rose when measured in rubber-band dollars). However, along with this, we see a reduction in scarcity, with the co-basis moving from -1.25% to -1.4%.

Including on Friday, when the price of gold dropped. Which means the price move was caused by selling of metal rather than futures.

The Monetary Metals Gold Fundamental Price fell hard, from $1,352 to $1,272, especially on Friday. We shall see if this drop is durable.

So let’s look at silver.

Miraculous Credit Spreads – Precious Metals Supply and DemandSilver basis, co-basis and the USD prices in grams of silver

In silver, the same action occurred Thursday and Friday  — the price of metal falling (dollar measured in silver, green line, rising) with the co-basis falling concurrently. Someone was selling metal.

The Monetary Metals Silver Fundamental Price also fell hard, from $15.83 to $15.27.

Charts by: StockCharts,  St. Louis Fed, Monetary Metals

Chart & image captions by PT

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

 

 

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Miraculous Credit Spreads – Precious Metals Supply and Demand 
 

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Keith Weiner
Keith Weiner is president of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of the precious metals fund manager Monetary Metals. He created DiamondWare, a technology company that he sold to Nortel Networks in 2008. He writes about money, credit and gold. In March 2015 he moved his column from Forbes to SNBCHF.com.

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