Prepare for More Downside
Prepare for more downside... A bond-market reversal is now underway... The next gold and silver correction could be starting, too...
In recent weeks, we've warned you of an impending reversal in one of the world's most popular trades...
We're referring to the relentless rally in government bonds – and U.S. Treasury bonds, in particular.
As regular Digest readers know, bonds have been on a one-way move higher for much of the past year. But the rally really began to accelerate this summer as interest rates around the world crashed. As we noted a little more than a month ago, in the August 7 Digest...
The charts of many bonds are starting to look more like high-flying growth stocks than anything you typically see in the credit markets.
The following chart of U.S. Treasury bonds – represented by the iShares 20+ Year Treasury Bond ETF (TLT) – puts these moves in perspective...
But just over a week later, we told you that this move was unlikely to continue much longer...
And when it reversed, bonds could quickly suffer double-digit declines.
The biggest reason had to do with sentiment...
Investors had become downright giddy about "boring" government bonds. In fact, investors had only been more bullish on bonds one other time in history – on December 16, 2008, the day the Federal Reserve first announced it would begin buying Treasury bonds as part of its quantitative easing ("QE") program. As we explained in the August 16 Digest...
On that day, virtually everyone was bullish on Treasury bonds... And frankly, who could blame them...
Bonds had been soaring nearly nonstop since that spring. That rally had caused the yield on 30-year U.S. Treasury bonds to plunge from more than 4.8% in June 2008 to well below 3%. Yet, the Fed had just announced that it could soon start buying billions of dollars' worth of Treasury bonds each month. Surely, that was a recipe for higher prices still?
Not exactly... It turns out that the U.S. Treasury bond market peaked just two days later on December 18. Prices plunged more than 20% over the next six months... causing the 30-year yield to soar from roughly 2.5% to back over 4.8% by mid-June.
Given today's bullish extremes in U.S. Treasury bonds, we could easily see a similar move this time around.
We reminded you about this risk again on Friday...
We hope you were listening... Because this reversal may already be underway.
TLT fell nearly 2% today. It is now down more than 3% so far this month. And as you can see in the updated chart below, it has now broken down from its near-parabolic advance...
Further declines are now likely. TLT could easily fall 20% or more over the next several months as long-term interest rates move higher again.
Of course, Treasury bonds aren't the only asset we've warned about recently...
Over the past few weeks, we've also noted that similar sentiment extremes have been growing in precious metals as well. We last reviewed our advice in the September 4 Digest...
As we've noted before, these extremes are not a reason to sell all your gold and silver. But if you've already followed our advice to put a reasonable percentage of your portfolio in precious metals, we would recommend waiting for a pullback before making new purchases today.
This advice applies doubly to gold and silver stocks.
As we've explained, these stocks provide leverage to the underlying price of the metals. When gold and silver rise, these stocks can soar multiple times more.
But this leverage works both ways... which means when gold and silver fall, gold and silver stocks can fall much further. Even the best gold and silver stocks could easily fall 15% to 20% during a normal precious metals correction.
Again, we hope you were listening...
As you can see below, precious metals peaked that same day...
Gold has fallen a little more than 3% over the past three days. Silver has fallen roughly 8%. And as we warned you, gold stocks – as tracked by the VanEck Vectors Gold Miners Fund (GDX) – have already fallen more than 10%.
We'll remind you that this is not a reason to panic and sell all your gold and silver...
We remain as bullish as ever on the long-term outlook for precious metals, and we believe the prices of both gold and silver will rise dramatically over the next several years.
But we're sure to see plenty of corrections along the way... and there's a good chance the next one is already underway.
If this relatively minor pullback is already keeping you up at night, it's a sign that you probably have way too much of your money in precious metals. Consider lightening up your exposure – particularly to more-volatile gold and silver stocks – to reduce your risk.
If gold and silver fall further, you'll be glad you did... and you'll have plenty of "dry powder" to take advantage of lower prices.
New 52-week highs (as of 9/6/19): Blackstone (BX), Dollar General (DG), Digital Realty Trust (DLR), Home Depot (HD), iShares U.S. Aerospace and Defense Fund (ITA), iShares U.S. Home Construction Fund (ITB), Medtronic (MDT), MarketAxess (MKTX), Nestlé (NSRGY), Sysco (SYY), and AT&T (T).
In today's mailbag, a reader wants to know how to profit from a decline in bonds. As always, send your comments and questions to feedback@stansberryresearch.com.
"'Based on previous extremes, Treasury bond prices could easily fall by 20% or more in the months ahead.' If TLT is 'overbought' and there could be a fall by 20% or more and we thought this the case, would one benefit then by shifting investments from TLT to the inverse TBF? Please advise what your thoughts are, and I appreciate the analysis. Best regards." – Paid-up subscriber Brad B.
Brill comment: As longtime readers know, we don't make official recommendations in the Digest. But yes, you're correct... If an investor is interested in profiting from a decline in Treasury bond prices, buying one of the inverse bond funds – like the ProShares Short 20+ Year Treasury Fund (TBF) you mentioned – is a simple "one-click" way to do so.
Regards,
Justin Brill
Baltimore, Maryland
September 9, 2019