The Coming Catastrophe in Government Bonds and Bond Funds (GLD, TLT, TBT, C)
Buying by the central banks of Mexico, the Ukraine, the Philippines, and emerging countries is restoring faith in gold as the long-term safe haven trade. According to the IMF, Mexico and Kazakhstan were active buyers in April, and the Philippines added a million ounces to its reserves in March.
Gold ran up 14.3% in the first three quarters of 2011 when its safe haven status was firmly established and Societe General’s metal analyst, Robin Bahr, said this week that it will follow the next risk off event, similar to the Lehman collapse. Greece is the most likely driver.
OCBC analyst Barnabas Gans sees $1,800 per ounce by the end of 2012. He sited a third round of quantitative easing by the U.S. as the catalyst for a return to gold.
The other factors driving gold’s next run is its correlation to copper prices. The correlation between gold and copper is seen as an indication of weakening economic conditions and it is currently at .5, up from .3 a year ago.
The Journal reported this week that the sell-off we have had for the past few months has been largely driven by fund selling, which could easily shift as the reality of Greece’s departure from the EU and the depths of Spain’s problems emerge.
The long and short of this one, look for increased buying by funds as the Greek and Spanish situations develop.
Government Bonds and Bond Funds: Run for the Hills
Get out of your government bonds and bond funds now, now!
At some point it can’t be called investing anymore! I’m talking about how low the rates have dropped on government debt in the few remaining countries that have the confidence of the world, Germany and the U.S.
Last week the German government sold bonds to an overflowing crowd of buyers at 0% interest, 0%! Two-year notes that pay no interest!
Bond prices in Germany and the U.S. have been driven so high by the international flight to safety that you can’t call what’s going on investing, it’s parking or maybe idling. Why bother?
Thirty-year bonds, 30 years, that means if you invested in 1982 you’d be getting your money back this year, are paying 2% in German bonds. The U.S. isn’t much better at 2.84%.
Ten years are no better, in fact, if you caught a segment I did here a few months ago, I talked about a German bond auction that actually cost the investor a few cents per bond to own. They lost money on them.
That’s crazy enough, but here’s the real risk.All prices that run way, way up, government bonds in this case, will come way, way down. It’s just a matter of time before either interest rates run up or the confidence the world has in Germany and the U.S. slips maybe because of some black swan event, and when it does, these bonds will be as out of favor as bad head colds.
I have been pounding the table about this coming correction all year. It’s coming.
So where’s the safety? At this point I would describe government bonds in the U.S. and Germany as high risk.
If you could get 10% or more from them, there might be a case made for owning them now, you could collect 10% and ride out the price drop to maturity, but come on, 0% for two years. What does it take?
Maybe Oprah has to get on TV and talk about the real risk here. She seems to be the only person anyone listens to in this country.
Get out of your government bonds and bond funds now, now!
A China Insider Talks Property
An MIT grad who has spent one fourth of his life in China said in a recent Barron’s interview that he likes retail, internet companies, autos and real estate in China.
But, he is all about real estate!
Earl Yen, who spent years with Citigroup (NYSE:C) and Bear Sterns in Asia as an investment banker, says most people do not understand what’s happening in Chinese real estate and as a result developers are selling at a 40% to 50% discount.
According to Yen, there has been a broad negative brush stroke by western investors that has obscured the fact that there is real money on the line in Chinese home purchases; 30% down is required to buy as compared to the highly leveraged U.S. market.
And, there is real demand; 20 million people moved from farms to cities last year in China and they have to live somewhere.
Yen sees real estate turning around and that bodes well for the developers and furnishing companies.
He likes and owns Royale Furniture Holdings on the Hong Kong exchange. It’s a manufacturer and a retailer and has a very cheap PE of around 5 for 2012 earnings.
The real estate companies he likes are Shui On Land (272:HK) and Central China Real Estate (832:HK), both on the HK exchange, as well.
Shui On Land trades at only eight times 2012 earnings despite a 73% increase in revenues, and Central China Real Estate trades at a pitiful 4.1 times earnings at .67 book value.
China still is growing at about 8.1%, so don’t let all the bad news on the TV keep you out of this market.
This week, the slap-in-the-face award goes to a Japanese tech company, NecoMiMi. They, and several others, have developed software that literally allows the user to move objects with their brainwaves. You wear a headband that senses your brain activity and turns that into energy.
Other developers in this arena have used the software to suspend a ball in mid air using only thoughts and in games they have allowed the user to control the game with just his thoughts.
All this sounds really great until you get to the part where NecoMiMi developed a pair of ears the user wears that rise and fall based on the user’s level of concentration.
The best use put forward so far for this quantum leap in programming? Use the ears’ movement to express romantic interest in another game player.
Great! Now these games addicts, who already live on their consoles, don’t even have to get off their computers to find a mate.
We may be evolving into a bunch of keyboard/control stick dwelling extensions of our microprocessors.
Related: (NYSEARCA:GLD), (NYSEARCA:IAU), (NYSEARCA:TLT), (NYSEARCA:TBT), (NYSEARCA:AGG), (NYSEARCA:BND)