The return on cash might well be very low if you hold it for the long term but think of it this way. If equity markets crash 30% or more in the short term, you have effectively made a 30% return on your cash by converting your equities into cash before this happens. When US bond yields rise at the speed we have just seen it means people are selling bonds (US Treasury notes). US bonds are more or less equivalent to US dollars as they are just promises to pay the bearer of those bonds US dollars in the future. The fact that people are selling bonds now is probably related to bond traders believing that the demand for newly printed bonds to fund the Democrats covid stimulus plan will be weak so the burden will increasingly be on the Fed to monetise ever greater proportions of the bond offerings that are made. The market is basically saying that they have begun to lose faith in the ability of the Fed to carry such a massive balance sheet and that the US dollar is going to go lower. This means the AUD will probably be going much higher which in turn means that the AUD gold price is probably going to go much lower irrespective of whether the market crashes when traders see that bond yields start to exceed equity market yields. Historically the conventional logic would be why invest in equities, which are considered high risk, if the yield I get from government backed securities is higher. In the final conclusion this is sound logic and it will hold IMO and it will be what limits the equity markets from going higher even if they don't immediately crash. The new stimulus is likely to cause the final rise in equity prices sending markets higher and causing equity yields to race to historically low near zero levels and the final top of this cycle will be found. Concurrently bond yields will keep rising as money is lured out of bonds into the bubble equity market, inflation in the real economy will start rising as more people convert their newly available relief cheques into goods and services and commodities priced in USD will rise feeding into US inflation. The Fed will be increasingly cornered and the market will eventually crash in dramatic style. It is inevitable, history lights the path. When this happens the markets will run into the same scenario we saw in March last year and a liquidity crisis will ensue sending the price of all financial assets lower, including gold. Those holding cash would then be smart IMO to convert it into physical gold over the months that the crash tries to find its bottom as by this time all the first time investors will be wiped out of their stupid speculative follies and the gold will look like a very attractive option in relation to other asset classes, having fallen the least.
Think of the markets like a bath tub full of water. If you drop a weight into the tub the water starts to slosh around. As you drop bigger weights with more force the water sloshes even higher. As long as the water is contained and doesn't spill out the market works fine, you have winners and losers and all the market liquidity remains in tact. It's once you get slippage in the market that things stop working. Remember people don't buy and sell stocks in a continuous and smooth fashion where for every winner there is a loser. Sometimes you wake up and prices have gapped down significantly or you can get slippage during intraday trading when buyers disappear. The plunge control algorithms don't stop this slippage they only try and limit it so that order in the market is restored. This slippage in a crashing market is like the water washing over the sides of the bath tub. That water/liquidity aka money is lost, never to be recovered or available for market participants to use again. The problem is when equity markets worldwide are worth upwards of $100 trillion dollars, a 10% slippage event means a loss of $10 trillion. If you have a crash like occurred in 1929 the slippage would amount to about $89 trillion dollars. These are staggering numbers that no central bank in the world has the power to help recapitalise. The democrats and Trumplicans have been arguing over only a few trillion for the best part of a year. You see, the reset when it comes will make its own rules.
Under this scenario companies like NST will suffer even before the crash as the price of AUD gold falls. Based on NST's latest half yearly, if the price of AUD falls below $2,028/oz (10.9% from its current level) then about 240,000oz of annualised gold production goes underwater. If the price falls back to $1,770/oz, where it traded at as recently as about 2 years ago, then 450,000ozs of annual production is underwater. NST's production cost structure is quite adverse to price shocks in its underlying product. This also doesn't address their recent spate of operational problems at their ageing and ever deepening mines, from mine shutdowns due to failures to seismic events curtailing production schedules. My feeling is that the company has been adopting more aggressive blasting and mining techniques that also pose a risk to production going forward.Esh
NST Price at posting:
$10.33 Sentiment: None Disclosure: Not Held
(20min delay)
