Tue, Jan 6, 2015|Sean Goldsmith

Global bond yields hit a record low...

Global bond yields hit a record low... The world doesn't see inflation... Bill Gross doesn't think the Fed will intervene for a while... Doc Eifrig: Why the Fed can't control interest rates... It's all about supply and demand... Why silver could soar... Jeff Clark sees a silver stock breakout... Our annual Report Card is in the works...

The flight to safety continues today...

Yields on the 10-year Treasury fell to less than 1.9%. Crude fell another 4% to nearly $48 a barrel.

And for the first time in history, the average 10-year bond yield of the U.S., Japan, and Germany fell to less than 1%, according to Steven Englander, global head of G-10 foreign-exchange strategy at Citigroup. Taking inflation into account, the average real interest rate is negative.

Bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an aggregate yield of 1.28% as of yesterday... the lowest level since data first became available in 1996.

In other words, the world isn't expecting much inflation. Falling oil prices, a slowdown in China, a struggling European economy, and Greece's possible exit from the euro all point to slow global growth.

Yesterday, we told you that "Bond God" Jeff Gundlach believed Treasurys would retrace their record-low yields. "Bond King" Bill Gross – a former manager of the world's largest bond fund at Pimco – agrees that low rates are here to stay.

Most folks expect the Federal Reserve to raise interest rates in the first half of this year. In his latest outlook, Gross (who is now at investment-management firm Janus) said the Federal Reserve won't raise interest rates until late 2015, if at all.

Gross said lower oil prices and a stronger U.S. dollar (which make the Fed's interest payments more expensive) make it difficult for the Fed to increase rates, thereby increasing the government's borrowing costs. Gross urged caution in a note published on the Janus website...

With much of the benefit from loose monetary policies already priced into the markets, a more conservative investment approach may be warranted by maintaining some cash balances. Be prepared for low returns in almost all asset categories.

In the October issue of Income Intelligence, Dr. David "Doc" Eifrig explained why interest rates can – and likely will – stay low, even if the Fed raises rates...

Even if the Fed did raise short-term interest rates – the only interest rates that it directly controls – it's unlikely that long-term rates like the 10-year or 30-year Treasury would rise in tandem. The Fed is "powerless," and it's all because you – along with billions of other savers – still have your money in the markets. The Fed can't push up interest rates because interest is the "price" of borrowing money. Prices, of course, are determined by supply and demand. It's basic economics.

Despite the Fed's posturing, interest rates on everything but overnight loans between banks reflect the supply of bonds outstanding and the demand, as determined by the amount of dollars ready to buy up bonds. You can't short circuit the supply-and-demand equation. There's no such thing as "artificially" low interest rates, like some Fed skeptics argue. Bonds will rise and fall based on changing investor perceptions leading to higher or lower demand... not because of a decision from a central bank.

Doc also cited growing global wealth as a reason that interest rates are staying low. According to Credit Suisse's Global Wealth Databook, total global wealth rose to $240 trillion in 2013. That's more than double the $113 trillion in 2000 and up 31% since the 2008 financial crisis.

That wealth is coming from emerging markets, which have higher savings rates than developed economies. It's also coming from corporations... Non-financial firms have more than $1 trillion in cash on their balance sheets, and it's sitting in Treasurys. Also, the population in developed economies is getting older... and they need to invest their savings.

So demand is growing while supply is shrinking. From Doc...

While many worry about our national debt, our spending gap has been significantly downsized over the past seven years. The deficit has dropped from $1.4 trillion to about $700 billion – from 10% to 4% as a percentage of GDP. In turn, this means the government is borrowing less money and issuing fewer Treasury securities. So this massive pile of savings and wealth (the "global savings glut") is chasing a smaller pile of available assets.

As a result, the market is faced with higher demand and lower supply. That keeps interest rates on Treasury securities down... Compared with this real demand, the Fed setting rates – and its relatively small bond-buying programs, known as quantitative easing – has little effect on where rates will be in the near future.

In other words, there's a record amount of money in the world today and it's looking for safety. The U.S. Treasury is the safe-haven asset of note.

But Treasurys aren't the only safety asset rallying today... Investors are also buying precious metals. Gold jumped 1.3% today to $1,219 an ounce. It's up 7% since November. Silver is up 2.4% to $16.56 an ounce. It's up 8% over the same time period.

Gold stocks jumped even higher... The Market Vectors Gold Miners Fund (GDX) was up as much as 6.4% as of midday trading. Shares are up nearly 25% in the last two months.

And two of our analysts say we're about to see a major rally in silver and silver stocks. In yesterday's Growth Stock Wire, Stansberry Resource Report editor Matt Badiali noted that the silver-to-gold ratio (the ounces of silver needed to equal an ounce of gold in price) is approaching a historic high. When the ratio gets out of whack, silver soars...

Over the past 20 years, the average silver-to-gold ratio has been 62. So you could typically buy an average of 62 ounces of silver for the price of an ounce of gold. But occasionally, silver prices fall faster and further than gold prices... and the silver-to-gold ratio reaches an extreme.

We've seen this happen just three times in the past 20 years... when the silver-to-gold ratio peaked around 80. And after each of these times, silver prices soared to return the ratio back to normal. Take a look...

The silver-to-gold ratio hit an extreme in 1995, 2003, and most recently in 2008. Silver prices went on to rocket 70%, 200%, and 420%, respectively, over the next two to three years. And the silver-to-gold ratio is near an extreme again today.

In the latest issue of the Stansberry Short Report, expert trader Jeff Clark noted a bullish pattern in silver stocks based on the nine-day exponential moving average (EMA) crossing over the 50-day moving average (DMA) – a so-called "bullish crossover"...

Silver stocks are stronger than gold stocks. As I mentioned in the Direct Line a few weeks ago, silver stocks are leading the mining sector. We've already seen bullish crossovers on the charts of many individual silver charts. For example, look at this chart of Silver Wheaton (SLW)...

The bullish crossover occurred in late November. SLW shares immediately spiked 10% higher. Since then, SLW has pulled back. The nine-day EMA came back down toward the 50-DMA. Now, the stock is trending higher again. This is bullish action.

New 52-week highs (as of 1/5/15): Deutsche X-trackers Harvest China A-Shares Fund (ASHR), Cempra (CEMP), Esperion Therapeutics (ESPR), Invesco Value Municipal Income Fund (IIM), Nuveen AMT-Free Municipal Income Fund (NEA), Nuveen Municipal Opportunity Fund (NIO), Osisko Gold Royalties (OR.TO), and ProShares Ultra 20+ Year Treasury Fund (UBT).

As you'll see in our mailbag response below, the annual Report Card is currently in the works. As regular Digest readers know, each year, Porter assigns a letter grade to every editor. Who, in your opinion, deserves an "A+" for 2014? Who let you down? Let us know at feedback@stansberryresearch.com.

"Thank you for your expert analysis in Stansberry Alpha. This past month I have made over my Alliance membership. I am particularly thrilled at the monthly ideas that have been presented. Thank you so much for the ideas." – Paid-up subscriber Roger Hallenbeck

"Hello, I've been subscribing to the Stansberry services for over a year, Stansberry Investment Advisory and True Wealth. I started buying stocks in two different portfolios since April of 2014.

"The reason I've decided to separate and come up with the two different portfolios is because I think Porter and Steve have two different strategies on evaluating and recommending the stocks, where Porter stock picks are based on more of fundamental (cash flow is the king) analysis and Steve's in my opinion are more contrarian and picks are based on the future economic trends.

"Overall I've beaten the S&P 500 where scores are Stansberry Investment Advisory at 13.35%, True Wealth at 15.99%. Keep up a good job, I've learned a ton and continue to gain knowledge from these two gurus. Thank you." – Paid-up subscriber Nick K.

Goldsmith comment: We're glad to hear you're profiting from our recommendations... 2014 was a great year for Stansberry's Investment Advisory and True Wealth subscribers. Steve Sjuggerud is sitting on a 47% gain in Indian stocks since last January and a 48% gain in around three months in Chinese stocks. And five of Porter's team's positions are up double digits since they recommended them in 2014.

Porter is hard at work on the annual Report Card, where you'll see exactly how well each editor performed last year – and what grade Porter assigns them. You should see the finished product in the next few weeks.

Regards,

Sean Goldsmith

Baltimore, Maryland

January 6, 2015