The Biggest Reasons to Hold Cash and Gold Today

The comments below are an edited and abridged synopsis of an article by Justin Brill

Thanks to renewed dovishness from the world’s central banks, the global value of negative-yielding debt soared to more than $13 trillion in June. Now, that record figure is beginning to look tame. The spread of negative-yielding debt has been accelerating, and it has coincided with a stunning rally in government bonds.

The Biggest Reasons to Hold Cash and Gold Today | BullionBuzz
Close-up of a 20-dollar banknote (figuring president Jackson) and a gold bullion

Many bonds are starting to look more like high-flying growth stocks than anything typically seen in the credit markets, and many government bonds globally are showing similar, near-parabolic moves. But bond prices and yields move in opposite directions. And as a result, yields are plunging back toward record lows.

The Treasury yield curve is one of the most reliable early warning signals for stocks and the economy. The most commonly followed is the spread between 10-year and 2-year Treasury yields. Whenever the yield curve has inverted, bear markets and recessions have inevitably followed anywhere from six to 24 months later.

As a result of recent moves, nearly three-quarters of the yield curve is inverted today. Based on that, the Federal Reserve Bank of New York now says there’s a 31.5% chance of a recession in the next 12 months.

Meanwhile, several important commodities are moving, too: copper, crude oil, and precious metals are surging, and the move is strengthening. Gold has reached a new 6-year high above $1,500 an ounce, and silver is joining the party.

Unfortunately, when you consider the evidence—a panic into the government bond market, spreading yield curve inversion, foreign currency and commodity weakness, and a relentless rally in gold—it leads to an uncomfortable conclusion.

The market is beginning to price in a global recession or a burgeoning debt crisis—or possibly both. In any case, a new bout of market trouble could be approaching. The biggest reason has to do with corporate debt markets. Specifically, the high-yield bond market is not yet signaling trouble.

While both junk bond yields and spreads have been moving higher, they remain historically low. They’re still well below levels that have indicated serious problems in the past. That could change.

For now, history says we should give this bull market the benefit of the doubt a little longer. That doesn’t mean there won’t be further market weakness in the near term. There could be another sharp correction like the one last fall, even if we ultimately avoid a recession a while longer.

Either way, the case for holding plenty of cash and a healthy allocation to precious metals is stronger than ever.

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