Gold and silver are now trading at the cheapest premiums in memory given the unpopularity of owning the metals. This is happening despite the surging rationale for having an uncorrelated portfolio hedge. As February ended we were not far off from a make-or-break double bottom in fixed income and bond mogul Bill Gross said:

"If 2.6 percent is broken on the upside ... a secular bear bond market has begun. Watch the 2.6 percent level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important than dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock prices in 2017…Investment happiness and/or despair may lie ahead over the next 12 months depending on it."

Friday’s 10 yr. yield rose and closed at 2.6% exactly, putting us at the threshold of reversal to the 35 year bond bull market.

The importance of the declining rate backdrop has colored our entire professional careers, boosting stocks, bonds and levered real estate while diminishing the importance of gold diversification.  We are complacent over the significance of this pending reversal. Bill Bonner penned a paragraph about the enormity of this generational sea change:

"This is a world whose major institutions - banks, pension funds, governments, large corporations; i.e., the major players in the Deep State system - have flourished on extremely low interest rates.  Now… even an increase of just 1% in the cost of servicing debt - if applied to the world's debt load - would cost more than $2 trillion a year in interest.  Consequently, everyone who had to borrow - i.e., those aforementioned major players - would suddenly find themselves unable to continue living in the style in which they'd become accustomed."

This week the Fed will meet and likely continue its interest raising path, potentially pushing us through critical support levels for bonds singlehandedly. Somehow, Wall Street has convinced itself that despite the inability of the debt-laden financial system to absorb higher rates, increases are positive for paper assets. Amidst this group-think, the Fed has gotten away with completely twisting its entire mandate from inflation vigilante to being responsible for creating inflation.

Perhaps it should not be a surprise then that against this backdrop investors have convinced themselves that equities will benefit from inflation too.  Investors believe that equity operators will raise prices faster than costs will increase … yet this mentality failed miserably during the last inflationary cycle.  Most of us were children when this trend last manifest itself and forget that gold rose 20x during that time while equity multiples compressed. Void of such first-hand experience, mutual fund cash positions are at a 19 year low and hedge fund liquidity, bludgeoned by the intensifying pressure to index-hug, is at an all-time low. This comes at a moment when market valuations are by several metrics at all-time highs. Layer in the lack of liquidity post Dodd-Frank, the new momentum chasing world of HFT, and the yet-to-be-understood issues around ETF liquidity in illiquid assets, and another JP Morgan moment rewarding gold allocations may be coming.

Gold has rallied sharply after the last two fed rate hikes despite the rhetoric from financial media that higher rates are bad for gold. Physical gold’s price has also diverged in price from paper gold’s in past periods of stress while liquidity in most cases is superior in physical form. And while it is true that gold’s ascent may be less pronounced for Americans because of dollar strength, it is worth remembering that all currencies are imploding vs. gold, just at different tempos. (Please let us know if you would like more data on this point.) This week the Euro may be particularly pressured should the Netherlands vote reflect further splintering of the EU. Despite this obvious looming pressure Europeans are underweight gold.

If you would like to discuss a strategy around initiating or customizing a physical gold position to protect your wealth in ways that even real estate cannot, this may be a timely juncture. We also welcome your pushback on comments you may have heard in the past challenging gold’s value.  Gold is the liquid uncorrelated asset.

We are closed Sunday, will re-open Monday and look forward to talking with you. Thank you.