The silent 800-pound gorilla in the room that no one is talking about is inching ever closer to what will likely be the most significant technical breakdown of our lifetimes. And that market is: the US 30-year bond. As precious metals investors, it is important to monitor the bond market. The relationship between precious metals and bonds shows us the market’s faith in tangible versus paper forms of safety assets.
Recent Developments in the US Bond Market
The bond market has been relatively quiet for the past six months. Therefore, it has received little discussion from us here. However, that is not because we are not monitoring it – far from that, we consider this a must-watch market every week. However, when a market moves sideways for months, there is sometimes little to report… that is, until potential near-term price action causes a market to test a critical multi-decade support level.
That test is soon to occur.
Let us examine:
Note how US long-term bonds are creeping ever closer to the lower boundary of their rising multi-decade channel (magenta color). The lower channel boundary comes in at 137.0 on the 30-year bond price, and as of the close this week the market finished at 141.7. A mere 4.7 points separate the bond market from breaking a generational rising trend.
Of course, precious metals investors should remember that bond prices and interest rates move inversely. Thus, when we talk about decades of rising bond prices, we are also talking about decades of falling interest rates.
This orderly linear channel, with rising peaks and rising troughs sequentially forming a steady pathway upward, has lasted incredibly for nearly four decades. Ten US presidential terms have come and gone… multiple times, Iraq and Afghanistan have both been invaded… the internet and cell phones took over global communications… and the global credit crisis came and went… yet all the while, investors continued to pour money into bonds. Ceaselessly, relentlessly… for 38 years (and counting).
Bond Market Impacts Living Standards
Let us not forget that it has been falling interest rates, coinciding with cheap lending for businesses and governments alike. This set the stage for the world which we now know and enjoy. Everything from corporate profits, to government spending on military, education, roads, and social programs, as well as our very own ability to purchase homes through low mortgage rates, is either directly or indirectly tied to the price that the market sets for long-term bonds.
Signs of a Top
The bond market is showing all the classic signs that a final top may have already been put into place based on our analysis. Note (chart above) the parabolic blowoff curve above the upper channel and subsequent failure (blue callout) in 2016 — hallmark signals of a market that has formed an unsustainable momentum topping pattern.
The next piece of the puzzle for a top to form from a technical perspective is to see the market break its lower rising trendline at 137.0.
Where can we see this exact same technical setup from history? It occurred in none other than the gold market from 2008 – 2011, as the precious metal advanced toward its final top in 2011:
Although the time period was shorter, notice how gold formed a clear orderly linear rising channel (blue) from 2008 through 2011. In 2011, it was then exceeded in a parabolic curve into the peak, above $1,900 per ounce. From there, the precious metals market retreated back into the trend channel, only to break the lower boundary at $1,650 in 2012. Following an unsuccessful attempt to recover the broken trend in late-2012, the bear market for gold ensued which saw prices fall by nearly 45% by 2015 to $1,045.
This same technical setup is now playing out for the bond market, simply on a longer-term timescale. And further, the bond market is many times the size of the gold market, being more directly tied to the financing of our government and way of life.
Ramifications of a Long-Term Bond Top
What will happen if the bond market breaks its rising 38-year channel and interest rates thus begin to rise in earnest? How will the government, with all-time record debt levels, be able to finance its interest charges? As you follow our analysis, these questions and more remain to be seen.
Further, where will the market turn if it desires safety from traditional assets? If bonds begin a new declining trend, where will investors turn in times of market volatility?
We suspect the precious metals market will become a prime beneficiary as this process plays out.
This test for the bond market at the 137.0 level is coming over the next 6-18 months. Even if bonds simply continue to consolidate sideways, the test will occur. A breakdown is not guaranteed. Nevertheless, beginning to show up are all the classic signs of a long-term top having been put into place.
A long-term top in the bond market will be incredibly significant, having major implications for the US and world governments. Let us continue to monitor this silent 800-lb gorilla sitting quietly in the corner of the financial world as it begins to approach the boundaries of its generational cage.
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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