The Moneychanger
Daily Commentary
Monday, 21 November a.d. 2016 Browse the commentary archive

From a reader in Greece: "One of these days could you explain the bond market & yields and how they have an inverse correlation and the moon is made of green cheese & Janet Yellen's face IN PLAIN ENGLISH so even a Bozo like me could understand it?"

Here you go, in simplest terms:

Suppose a bond pays 10% interest & will pay out $100 a year from today. I can buy that bond today for $90 ($100 less the 10% interest to be paid in one year).

Suppose another bond pays 5% interest & will pay $100 a year from now. Today I buy that bond for $95 ($100 less 5% interest).

The higher the interest rate, the lower the bond price. Lower the interest rate, higher the bond price. Bond prices move opposite to interest rates: inverse correlation.

Now complicate it. Make it a 30-year bond, where you must jump through mathematical hoops to figure "net present value" (what it's worth today). The more years you discount for, the more an interest rate rise or fall changes the bond's price, because you are discounting at that interest rate not for one year (not one time only) but 30 times. That's term risk.

Ohhhh. Thirty year bonds take a BIG lick when interest rates rise. And the bond market is twice the size of the stock market, so more people are affected. And over 36 years of the Fed suppressing interest rates, investors have fondly come to expect as a law of nature that "bonds always rise." Yet bonds also FALL, as they will now be taught with whips, barbed wire, and scorpions.

Complicate it more. When interest rates change, ALL financial assets are re-priced to adjust their present value to that implied interest rate. Because they are riskier than bonds, stocks are always supposed to return ("yield") more. Therefore, "other things being equal" (& they never are), rising interest rates will re-price stocks downward, and ALL other financial assets.

Same thing holds true for silver & gold, except as with all else, interest rates are not the ONLY determinant of value. The other is MARKET EXPECTATION. For example, regardless the interest rate in Japan, when Prime Minister Abe announced plans to cheapen the yen two years ago, the market expected he meant it and lowered its bid for yen accordingly.

So with gold and silver. Regardless the interest rate, investors flee to silver & gold when they begin to distrust the financial and monetary system. Loss of confidence -- the market's expectation that the value of financial assets will fall -- creates in investors' little scared hearts a desire to flee to safety. That's why where inflation rises very high, or hyperinflation takes hold, it doesn't matter what interest rate the depreciating currency is paying; the depreciation loss from loaning it out for a year cancels whatever gain a high interest rate brings.

There. Everybody understand bonds and yields now? Let's move on to integral calculus.

TODAY'S MARKETS:

The overbought US dollar index fell back 27 basis points (0.27%) to 101.01. Must show more grit and gall to pierce that old resistance at 100.50 & stay there. Time for a correction, regardless whether it ultimately heads up or down.

Dow Industrials, S&P500, Russell 2000, & Nasdaq Composite all reached new all-time highs today. Dow Industrials rose 88.76 (0.47%) to 18,959.69. S&P added 16.28 (0.75%) to 2,198.18.

On the Dow industrials chart, here, http://schrts.co/Q6KUW0 you'll see that today's move blew the top out of the pennant I mentioned Friday. On the S&P500 chart here, http://schrts.co/vtdPMb you can see a rise and close piercing the top boundary of the rising wedge.

Am I slap wrong? Ain't ready to say that jes' yit. I stocks are forming bearish rising flags, today would fit right in. Clearly a mania is blowing off, fueled by Trump-gas. Wait, wait, stocks have nearly run out their upcycle.

I don't expect much out of silver & gold this week.. Gold rose $1.10 (0.09%) to $1,209.60 while Comex silver subtracted 10.1¢ (0.6%) to 1651.2¢.

When silver & gold are trending down, this week can be one of the worst of the year, partly because of thin markets on Friday. Presently I'm operating on the assumption (till proven wrong) that we witnessed gold and silver lows on Friday. To keep that true, silver must remain above 1650¢ and gold above $1,201.10.

Not content with Yellen's pale and pallid attempt to bully Trump, the Fed's No. 2 man Stanley Fischer gummed Trump's leg with this fiendishly killer line, "Having an independent central bank is a very important aspect of the way the economy runs. This is very important." Mercy, wake me up when he's finished. These folks need to learn something serious about trading threats & insults.

On 21 November 1877 Thomas Edison announced his talking machine invention, the phonograph. Took about 110 years to get to MP3s.

Argentum et aurum comparanda sunt —
Silver and gold must be bought.

— Franklin Sanders, The Moneychanger

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Market Snapshot See more charts and market data
21-Nov-16 Price Change % Change
Gold, $/oz 1,209.60 1.10 0.09%
Silver, $/oz 16.51 -0.10 -0.61%
Gold/Silver Ratio 73.256 0.512 0.70%
Silver/Gold Ratio 0.0137 -0.0001 -0.70%
Platinum 933.70 14.20 1.54%
Palladium 727.50 -1.25 -0.17%
S&P 500 2,198.18 16.28 0.75%
Dow 18,959.69 88.76 0.47%
Dow in GOLD $s 324.02 1.22 0.38%
Dow in GOLD oz 15.67 0.06 0.38%
Dow in SILVER oz 1,148.24 12.32 1.08%
US Dollar Index 101.01 -0.27 -0.27%
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SPOT GOLD: 1,211.30      
GOLD Fine Tr.Oz. BID ASK $/oz
American Eagle 1.00 1,247.64 1,251.88 1,251.88
1/2 AE 0.50 617.25 638.96 1,277.92
1/4 AE 0.25 311.65 325.54 1,302.15
1/10 AE 0.10 127.08 132.64 1,326.37
Aust. 100 corona 0.98 1,181.38 1,190.38 1,214.43
British sovereign 0.24 287.28 300.28 1,275.61
French 20 franc 0.19 223.89 227.89 1,220.61
Krugerrand 1.00 1,227.05 1,237.05 1,237.05
Maple Leaf 1.00 1,221.30 1,235.30 1,235.30
1/2 Maple Leaf 0.50 696.50 635.93 1,271.87
1/4 Maple Leaf 0.25 308.88 324.02 1,296.09
1/10 Maple Leaf 0.10 128.40 132.03 1,320.32
Mexican 50 peso 1.21 1,453.04 1,464.04 1,214.27
.9999 bar 1.00 1,215.54 1,223.30 1,223.30
SPOT SILVER: 16.55      
SILVER Fine Tr.Oz. BID ASK $/oz
VG+ Morgan $B4 1905 0.77 25.00 27.00 35.29
VG+ Peace dollar 0.77 20.00 22.00 28.76
90% silver coin bags 0.72 12,512.50 12,798.50 17.90
US 40% silver 1/2s 0.30 4,690.50 4,840.50 16.41
100 oz .999 bar 100.00 1,635.00 1,670.00 16.70
10 oz .999 bar 10.00 167.00 172.00 17.20
1 oz .999 round 1.00 16.35 16.85 16.85
Am Eagle, 200 oz Min 1.00 18.05 19.55 19.55
SPOT PLATINUM: 933.70      
PLATINUM Fine Tr.Oz. BID ASK $/oz
Plat. Platypus 1.00 948.70 978.70 978.70
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Warnings and Disclaimers

To avoid confusion, please remember that the comments above have a very short time horizon. Always invest with the primary trend. Gold's primary trend is up, targeting at least $3,130.00; silver's primary trend is up, targeting 16:1 gold/silver ratio or $195.66; stock's primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold or 16 ounces of silver. US$ and US$-denominated assets, primary trend down; real estate bubble has burst, primary trend down.

Be advised and warned:

  • Do NOT use these commentaries to trade futures contracts. I don't intend them for that or write them with that short-term trading outlook. I write them for long-term investors in physical metals. Take them as entertainment, but not as a timing service for futures.
  • NOR do I recommend investing in gold or silver Exchange Trade Funds (ETFs). Those are NOT physical metal and I fear one day or another may go up in smoke. Unless you can breathe smoke, stay away. Call me paranoid, but the surviving rabbit is wary of traps.
  • NOR do I recommend trading futures options or other leveraged paper gold and silver products. These are not for the inexperienced.
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Explanation of Terms

The US DOLLAR INDEX is the average exchange rate for the US dollar against the Euro, Yen, Pound sterling, Canadian Dollar, Swiss Franc, and Swedish Krona, weighted for each country's trade with the US. It gives a general measure of the US dollar's performance against all other currencies.

The DOW IN GOLD DOLLARS measures the Dow Jones Industrial Average in gold dollars (0.048375 troy oz. by law). The DiG$ depicts the Primary (20 year) Trend of stocks against gold. When the DiG$ is dropping, gold is gaining value against stocks in a trend that should last 15-20 years. The DiG$'s chart is identical to the Dow in ounces of gold, but gives us one unvarying measure all the way back to 1896. Because it shows the primary trend ("tide") of gold against stocks, for investors it is the single most important financial chart in the world today. Since its August 1999 high at G$925.42 (44.8 ounces), the DiG$ has trended down, targeting a G$80-G$20 (4-1 oz. of gold will buy the whole Dow).

The DOW IN SILVER OUNCES shows how many ounces of silver are needed to buy the entire Dow. The DiSoz is trending down with a target of under 36 ounces.

The GOLD/SILVER RATIO is the gold price divided by the silver price, and shows how many ounces of silver it takes to buy one ounce of gold. The Ratio shows us the Primary (20 year) Trend of gold's value against silver. When the Ratio's trend is dropping, silver is gaining value against gold. This trend targets a gold/silver ratio of 16 ounces of silver to one of gold within the next 5-10 years. That implies that silver will massively, vastly outperform gold before this bull market ends. When both metals are rallying, the ratio often (but not always) drops, confirming the rally.

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