Bond Yield Collapse Boosts Gold Over $2000; Silver Rips Higher; The Argentina Treatment: New Normal for Debt Settlement

The name is Bond. Treasury Bond.



Anyone with a recollection of the classic 1963 initial intonation of the James Bond introduction from the film, "Dr. No," is likely to also have some memories of five percent interest at savings banks, CDs offering yields of seven, or stocks that were marked by quarter or half-point gains and losses.

Whether one relates to Sean Connery, Roger Moore, or even the contemporary Daniel Craig, the message remains the same. When the secret agent with the license to kill shows up, it's a sure thing that the bad guy is going to have a rough go of it.

The treasury bond market is relatable in similar fashion. Normally, when bonds announce their arrival at the scene of the financial panic of the day via lower yields, it is normally a signal for hard times ahead. These days, with the Fed put in place through various schemes, asset purchase programs, and nefarious back-room dealings, bond yields and the structure of the curve don't seem to matter very much. Stocks keep churning higher. Life - or whatever we're calling the continuing COVID crisis today - goes on.

On Tuesday, the evidence of stress was plain to see. Bond prices racked higher, sending the yield on the 10-year note to a record low, 0.52%. The 30-year crumbled to 1.19%, leaving the complex with a top to bottom spread of 110 basis points (1.10%). There's also inversion at the 1-year and 2-year level, the former yielding 0.14, the latter, 0.11. Even worse, the 3-year dipped to 0.10.

None of that bodes well for the US economy, but Wall Street barely batted an eyelash. Stocks gained across the board, though the day's rally could best be described as "nervous."

There's nothing good about the US or global economy, no matter how hard the Fed and the Wall Street, CNBC, Fox Business, and Bloomberg stock jockeys whip their mounts. There just isn't. Month-over-month data will show the occasional impressive uptick, but whatever the measure, it's from some dismal low point created by coronavirus and government edict.

So, when bonds make their ominous introductions, don't expect much to happen to stocks. Rather, look to precious metals for a suitable response. While bond yields were headed toward Hades in a handbag, gold and silver were launched to impressive levels. Gold vaulted past $2000 and silver gained almost two dollars on the day, ripping from $24.50 to beyond $26 the ounce. This is the natural reaction in the precious metals when storage costs become cheaper than real (negative) yields and price appreciation appears to be a no-brainer as opposed to declining interest rates.

The moves haven't slowed overnight either. Traders in the near and far East know currency and empire collapse when they see it and have made the requisite adjustment in the price of real money. Those expecting a slowing of precious metals' daring ascent are going to be disappointed. The recent spike - especially in silver, normally the more volatile of the pair - is the natural reaction to the global mess created by central banks and aided by coronavirus. The destruction of fiat currencies is a slow process, but the precious metals aren't wasting any time signaling the coming cataclysm.

While the recent gains may not be entirely sustainable, long term prospects for gold and silver are nothing short of magnificent. When every currency is backed by good faith and credit - and there is little left of those - a runaway response by precious metals is to be expected. Over the next two to five years, gold could easily triple or more; silver could be priced well over $100 per ounce as the gold:silver ratio executes a reversion to the mean.

There was more good news on the bond front.

Argentina finalized deal with creditors over $65 billion in long-term debt that has been hanging over the South American nation like the sword of Damocles since May, when a scheduled interest payment went missing.

The deal worked out has some interesting non-moving parts, most notably the swapping out of old bonds for new ones at a price of 55 cents on the dollar, with principal payments delayed until 2024, ostensibly to give Argentina time to get its fiscal house in order (or to find another way to screw over even more creditors).

No matter the case, the Argentina Treatment is likely to set a new standard - a "new normal" - for debt negotiations.

This is what credit card companies and home equity specialists will be hearing in coming months and years.

"I'm unable to meet my debt obligations, so I would like the Argentina Treatment. If you can see to it that 45% of my debt is forgiven, I'll gladly pay you back at two percent or so, beginning in three years. Or, would you rather have your financial institution pound sand?"

Not exactly a debt jubilee, but what some may call a suitable solution to decades of high-interest credit card debt and squeezed homeowners with no piggy bank left.

At the Close, Tuesday, August 4, 2020:
Dow: 26,828.47, +164.07 (+0.62%)
NASDAQ: 10,941.17, +38.37 (+0.35%)
S&P 500: 3,306.51, +11.90 (+0.36%)
NYSE: 12,612.09, +75.28 (+0.60%)