Interest Rates Are Already Rising

In our analysis we have identified higher interest rates as the trigger that will burst the financial asset bubble. While Western central banks continue to suppress very short-term interest rates, insofar as they reflect the cost of borrowing, they are already rising as the chart of the US Treasury 10-year bond in Figure 1 shows. 

The initial rise in yield from 0.48% in March 2020 has not yet curbed enthusiasm for equity markets. This is normal cyclical behavior, because bond yields usually rise during the last leg of an equity bull market. And the current and likely final leg for rising US equities—and most others—commenced only days after the lowest yield seen on 9 March 2020. 

Investment psychology for equities turns positive at these times. A moderate rise in bond yields is taken to be evidence of improving economic prospects, and not a danger signal. A backward-looking investment establishment does not yet fear inflation, which it naively takes to be rising prices. Public participation increases, in the sure knowledge that the market is going up. 

This is reflected in borrowing to leverage bullish returns, the current position of which is shown in Figure 2, which is an alarming reflection of investors’ bullish mentality, but very few participants are paying attention to it. Furthermore, the Fed’s monthly QE injection of $120bn into financial markets gives everyone enormous confidence it will continue. 

It is the unwinding of this madness of crowds that always feeds into a subsequent bear market. The cause is in plain sight. A second rise in bond yields, driven by rising prices for goods being so assiduously ignored by the investing establishment and public alike, is in the making. And it is almost always the second rise in bond yields that triggers cyclical bear markets. But the US stock market does not operate in a global vacuum: out of their $30 trillion total in dollars, foreigners have $10.7 trillion invested in US stocks. Bearing in mind the messages from Figures 1 and 2, they are also deeply affected by the message from Figure 3 below, of the dollar’s trade weighted index. 

Since late-March 2020, when the dollar’s TWI turned south, gains of 90% on the S&P 500 have been offset by a 12.6% decline in the TWI. And in the light of President Biden’s high spending policies, the chart suggests foreign investors will be faced with an important break lower in the TWI, and that the cyclical rise in bond yields that inevitably follows will lead to a double loss for them on holdings of US equities. Unless they move quickly, foreign-owned financial interests could simply evaporate into losses.

The dollar’s TWI is very heavily weighted in favour of the euro, so the outlook for the latter is also important. In the Eurozone, consumer demand is now surging at the fastest pace since before the great financial crisis, without enough production to supply it. Consequently, the prospects for price inflation are at least as dangerous as for the dollar. The difference is the ECB still maintains a negative deposit rate, so bond yields and interest rates have a lower base from which to rise. It is that prospect which is sure to make an over-owned dollar vulnerable to a relatively under-owned euro. A similar situation pertains for the Japanese yen. 

But perhaps the most important currency rate will be that of China’s yuan. Last September, China began a progressive clampdown on excess credit which continues today. The few western analysts who are aware of it attribute this policy to cyclical factors, an attempt to prevent China’s economy overheating after earlier stimulus. They are also aware that tighter money in China will be reflected in a stronger yuan, potentially destabilizing foreign exchange rates. 

Furthermore, it also makes sense for China to attract investment flows currently overexposed to the dollar, by sending a clear signal that the yuan is the stronger currency. It would be China’s response to America’s attempted destruction of the Hong Kong—Shanghai Connect route for inward investment by deliberately destabilizing Hong Kong. And it would also strip US capital markets of foreign funds, forcing an early increase in dollar interest rates in the US’s authorities attempt to prevent a dollar collapse. 

The conclusion can only be that the sea-change about to hit capital markets will be both widely unexpected and sudden. Its degree of financial violence will reflect the accumulated difference between increasing government manipulation of markets along with the illusions created, and economic and monetary reality. Interest rates will not stop rising at a few per cent. Taking John Williams’s estimate of 11% price inflation as a starting point, markets will drive interest rates towards related levels. Swathes of indebted businesses will be threatened with failure before then, which is bound to be reflected in equity market valuations. The longstanding myth that the equity class offers protection against inflation will be debunked.

Alasdair goes on to show how the only real markets into which one might escape the horrors of a dollar collapse are the precious metals markets. I would encourage you to read the entire article, which includes several other important ideas, including “The fallacy of money printing to preserve wealth,” “The property/equity relationship,” and “The role of precious metals.”

Regarding our current situation, it is clear now that gold has begun its next major leg up. As you can see, it bounced off the 20-month moving average in March at $1,704.07 to close the month of May at $1,853.41, thus leaving $119.16 worth of daylight between the May average and the 20-month average.

So it looks like the next really big move is just getting started, and with respect to junior gold stocks I have never seen more great world-class gold discovery prospects in all the years since this letter’s origin in October 1981.

Regarding my own trades this week, I sold half of my Labrador at well over twice my cost. The stock was simply moving so fast in sympathy with New Found Gold’s ongoing spectacular results. I most certainly want to hang on to the rest of what I own. But keeping in mind that while Labrador’s geology is next door and perhaps identical to New Found’s ground, they need to come up with some strong drill results to move the stock higher. I also sold SIBANYE STILLWATER(SBSW) simply because I felt the need to increase my holdings in i-80 Gold, FireFox, and White Rock Minerals. In the case of i-80 and FireFox, I think there are catalysts that could move both of those stocks significantly higher in the next week or two. In addition to the sale of SBSW, I trimmed some of my gold (OUNZ) and some of my silver (PSLV), which I choose to hold as “cash” during times when I’m convinced gold and silver bull markets are on, as I clearly am now. That assay of a 1.5-meter FireFox visible gold intercept should soon be made public and i-80 will have economic studies revealed on both its underground and open pit at its Getchell Project. If you watch my “Back Stage” interview with Quinton Hennigh regarding White Rock Minerals and my interview with Patrick Highsmith of FireFox, I think you will understand why I have upped my personal exposure to those names. Also, I hope you will take the time to watch presentations and interviews I did with the following companies, all of which I invited to the May 20 Metals Investor Forum. Those companies are: Goliath Resources, Goldsource Mines, White Rock Minerals, FireFox Gold, and New Found Gold. I have posted links to all presentations and interviews related to the May 20 MIF at www.Miningstocks.com.

I was happy to see that Great Bear’s share price got some traction last week. Perhaps some serious professional investors are starting to understand just how amazingly large and rich the Dixie Project is. Subscriber Roger Barrow asked this past week about the Great Bear Royalties (GBRR/GBRBF). The company has a 2% Net Smelter Royalty (NSR) so if Great Bear produced and sold 500,000 ounces of gold per year at $2,000, it would generate $1 billion in revenues, of which 2%, or $20 million, would flow to Great Bear Royalties. Since Great Bear has only 27,292,580 shares outstanding, that would amount to pre-tax revenues of $0.733 per share. If Dixie may produce something in that range of gold production annually as I believe is likely, GBRR could sell at a considerably higher range than it now sells. I expect as the market begins to understand the hidden value at Dixie, GBR and GBRR will start to rise in value. That’s my view, for what it’s worth.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.