In continuing worry of the Chinese / US trade wars, the markets over the past two weeks have been gripped by a classic deflationary fear response: stocks have sold off, and all safety assets – whether real (gold) or paper (currencies and bonds) – have seen inflows.

As precious metals investors, one of the important indicators for us to observe is which fear – deflation or inflation – the market is focusing on. To do this, we should view how paper assets are faring compared to gold during a declining stock market episode.

Gold Price

Above, is a comparison showing the stock market (S&P 500), a real safety asset (gold), and a paper safety asset (US long-term bonds) since the May 1 top in stocks. Note how after both rising nearly in tandem two weeks ago, bonds outperformed gold during the most recent period of stock market weakness.

What this is showing us is that the markets are still focused more on deflation as the primary threat, not inflation.

During an inflationary period,  bonds should be the worst performing asset class. They should not receive a bid for safety alongside gold, because during a high inflation period, the value of paper dollars is what investors will worry about most. And the only thing worse than holding dollars now will be holding promises for dollars at a later date (bonds).

 

China Threatens to Sell Bonds

The writing is on the wall that a decline in bonds and a fear of paper assets could be on the horizon.

Below is a recent Twitter post by Hu Xijin, editor of the official Communist Chinese state-run newspaper, the Global Times. Note the threat by China to sell US bonds.

US Bonds

Mr. Xijin here has nudged the 800-pound gorilla in the room. A bond market failure should be the trigger which results in a precious metals revaluation which makes the 2015 – present period look like a mere blip on the chart.

Let us remember that China is the #1 holder of US Treasuries, at over $1.1 trillion. China, in essence, funds a major portion of the American way of life as we know it. Here is the first threat to sell US paper to come out of anyone officially associated with the Communist party that we are aware of.

The most ironic part? US Treasuries, which Mr. Xijin threatened to sell, rose due to the fear of China threatening to sell them!

In essence, what we see here is a Pavlovian response amongst bond investors who little more than the reaction “Equity volatility? 🡪 Buy Treasuries.”

 

The Bond Bubble?

This type of behavior shows us that the bond bubble – likely bigger than the NASDAQ bubble of 1999, the crypto mania last year, and the South Sea bubble of the late 1700’s combined – is still inflating.

A bursting of the bond bubble, a market which has been rising for 39-years, is the focal point of our precious metals bull market thesis.

Are we there yet? A signature of a long-term top appeared in the US bond market in 2016, shown in blue. A signature does not guarantee a top, but it does set a prerequisite for such.

Bond Price

 

Mainstream Disbelief

However, we are not there yet. Still, today, no one in the mainstream press believes that China could even contemplate selling its US Treasury holdings:

Their rationale? Selling some of China’s Treasury holdings would threaten the value of the rest of their Treasury holdings.

China's Holdings

We would like to ask these media outlets: when, then, could China ever sell any of its Treasuries?

Are Treasuries to be kept on China’s books forever, locked up in some accounting line-item as an “asset” yet without the possibility of ever using the purchasing power?

Such appears to be the rationalization of the mainstream press on why China will be forced to forever hold US debt.

We disagree.

At some point, even the most irrational of investors will stop throwing good money after bad. And this will be the day that the US bond bubble begins to deflate.

 

Takeaway for the Week

Voices within the Communist party are speaking about selling bonds.

Neither the US media nor the bond market itself believes China can ever sell.

Is this a mere bluff by China, or signs of the bond bubble in its final throes?

Precious metals stand to be the premiere world safety asset class when investors fear for the value of the paper which backs the entire system.


CHRISTOPHER AARON
BULLION EXCHANGES MARKET ANALYST

Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

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