The Bond Market’s Big Problem

Gold. It’s going up. In the last ten trading days, it’s up 7%. That’s a huge move for gold, and it’s rather similar to what happened at the beginning of this year when gold went parabolic. And it’s telling us something. What it’s telling us is that there is a switch going on out of bonds into gold.

It’s thought to be done not just by fund managers, but by central banks as well. And why would you be getting out of US bonds, US Treasuries? There are big holdings – by the Chinese, by the Japanese, by everybody really – in US bonds. And what they are doing is getting a little bit fearful about US debt.

There’s $37 trillion worth of debt in the US. The interest payments are now up to about $1 trillion a year, and they have to roll something like $15 trillion in the next year. So the bond market needs to be healthy. The concern is that the US are going to, at some point, lose a bit of control of the bond market.

That is going to make their ability to service their debt by issuing bonds harder. That could push rates higher. There is this potential – very unlikely, but possible – which we call the big one: a loss of control in the bond market. That would be Armageddon for everything, including the equity market.

The feeling is that some central banks, seeing this risk increasing, are selling bonds and buying gold. If it actually happened, the gold price would go parabolic and would be the asset class to be in.

Also – sidebar – crypto. Can you believe it? Another commodity that would probably go higher.

But gold in the very short term has moved because of two things. Probably Powell’s Jackson Hole speech, which made it pretty clear that they’re going to be cutting interest rates. They’ve got a meeting on September 17th. It was more dovish than expected. The jobs market is weaker than expected. And so everybody thinks interest rates are going to be cut. If interest rates go down – I won’t go into the linkage – gold goes up.

That happened.

The other thing that’s happened, which is more worrying, is this idea that tariffs might be illegal. There was a court ruling that they are illegal. The White House has until October 14th to appeal that decision. If they can’t appeal successfully, there is a chance that not only will tariffs be cancelled, but they will have to be refunded.

Can you believe that? The total effect is that the US government, which has around $75 billion worth of tariff payments this year compared to $25 billion last year, could lose that revenue. Trump is talking about $3 to $4 trillion of tariffs by 2030. It’s helping the US fund their debt. If you were to suddenly take that revenue away from the US government, suddenly the debt problem looks worse.

The bond market is not going to like it. You can see the evidence already – the US 30-year long bond yield has almost crossed 5% again, back to 2006 levels. And it’s not just them. The UK, France and Germany have the highest bond yields since 2006, 2009 and 2011. Japan too.

There’s a problem quietly building in the bond market. Those fearful of it are buying gold. And if these tariffs get cancelled, it could all suddenly cascade.

The market is looking a little bit nervous at the moment as we’ve got to the beginning of September – statistically, the worst month of the year. Probably because there were just a couple of bad years long ago in September.

But the market seems to be losing momentum. And suddenly gold’s going parabolic, which is a warning sign. So, let’s keep an eye out for what’s going on. It’s causing a soft start to September.