The yield on the five-year Treasury has dropped well below 1 per cent, closing at 0.94 per cent. This has further reinforced the clear downtrend in yields, as they are back to levels last seen at the height of the financial crisis in October 2008.
Gold prices also skyrocketed, as the SPDR Gold Trust came very close to the $175 level. GLD closed well off the highs, and the initial raising of margin rates on gold futures could signal the start of a well-overdue correction.
Typically it will take another 1 or 2 hikes in the margin requirements before a top is completed, but this should be watched over the next few weeks.
GLD has traded above both its weekly and monthly starc+ bands for a few weeks, which means that even though prices can go higher, the risk is high on the long side.
The iShares Silver Trust is still range-bound, and of course it is more economically sensitive, so if gold should top out it may be much more vulnerable. There is first support at $36, with more important levels at $34.
The Week Ahead
Instead of another rollercoaster rise this week, I expect a gentler ride…though the price range may still be quite wide. If you have some stocks that have been acting weaker than the market, I would use a rally towards 1,200 to 1,220 in the S&P to get out of them.
However, even if we have begun a new bear market, I still favour some of the cash-heavy, high-yielding stocks–especially if they get close to last week’s lows, where some panic selling occurred. With yields on money markets or Treasuries so low, they look like much more attractive investments, especially if long-term rates drop any further.
I am a bit more wary of the very-high-yielding stocks, as their debt will be more vulnerable if the economy does enter a recession. If you are tempted by 16 per cent to 20 per cent yields, remember: high yield means high risk. So please use stops.
Tom Aspray is senior editor of MoneyShow.com