Deflationary Forces Gather Strength – Where Do Investors Seek Refuge?

Yesterday renowned bond fund manager Jeffrey Gundlach said 2016 is a “go with it” environment for the Treasury bond/interest rate complex. In other words, investors and traders should follow the trend and not try to fight momentum.

If Gundlach is correct then market participants should pay close attention to the market action of the last 36 hours in which we have seen the yield on the 10-year Treasury Note drop 15 basis points and break down from a 2-month+ descending triangle pattern:


10-year U.S. Treasury Note Yield


The implications of this sell-off in Treasury yields are vast and potentially ominous; Flattening yield curve and declining declines at the long end of the curve historically coincide or precede recessions and/or bouts of deflation.

Meanwhile, equities are in a waterfall decline and every tiny bounce during the last couple of weeks has been vigorously sold. With today’s decline the small cap Russell 2000 Index entered ‘bear market territory’ with a ~22% decline from its peak last summer:


IWM (Daily)


Against the backdrop of an environment of falling real yields and sheer turmoil across global equities, precious metals appear to be particularly attractive. Gold & silver’s performance today was especially noteworthy given the strong deflationary odor emanating from global markets.

Precious metals tend to perform poorly in deflationary environments, however, the specter of global central banks turning the reflationary spigots back on full blast in order to combat the growing deflationary headwinds could be just the catalyst for the next $100 rally in gold and $3-$4 rally in silver:

Gold (Daily)


 Gold has support at $1080 and resistance near $1110 – it’s crucial that today’s low ($1080) holds.

Silver (Daily)


Silver breaks out from a 3-month bottoming pattern on a decisive move above $14.40.