Never Mind the Yield - Feel the Sentiment !

Sun, Feb 16, 2014 - 2:31pm

Scenario: Asset A and asset B were trading at 50 last week. Today asset A is priced at 100 and asset B is priced at 25.

Question: Which one would you buy?

Answer: for the short term buy A, but for the longer term buy B.

Next Question: Why?

Note that no information about earnings has been presented. Also no balance sheet or management pedigree is available. So how is it possible to answer the two questions I posed above?

Here is an added piece of information: sovereign bonds with a ten year term yield 3.5% per annum. The assets above both have zero yield, that is to say, there is no dividend.

So with zero earnings, vs 3.5% earnings in an alternative asset, a comparison between available assets valuation can now be made, producing an implied valuation for asset A and asset B.

On the basis of this understanding, and the yield from LIBOR for cash deposits, the assets of the world have been priced, and by comparison these valuations have been extended via correlation trading arbitraging algorithms into every asset.

There is a problem with that.

The bonds which were used just now to create a comparative price are priced by a Central Bank which is in effect selling them to itself. It is thereby creating it’s own prices, not free market produced prices.

And LIBOR has been proved to be a suspect pricing mechanism.

So we go back to my first two questions plus a couple more.

What are assets A and B worth?

What is gold worth?

Do you know why I offered two different answers above, to these questions?

Are you making due allowances for what you don’t know?

Here are some of the “don’t know” items:

At some undetermined time bonds will revert to a valuation not created by their issuers.

The value they revert to may differ by an undetermined amount from their price prior to that, or their current price.

This will alter valuations of many other asset classes as the revised comparator value becomes arbitraged into correlated assets to bonds, and the revaluation ripple spreads across the pool comprising all assets.

Is this a significant line of thought to follow?

That depends upon the reader’s point of view. You see, if the best value estimate of an asset is a function of these two things:

it’s risks balanced against it’s earnings,

and it’s growth potential

In that case, why does Bitcoin which has no growth, and no earnings have any value at all? And it definitely has a value, which changes violently from day to day, but a real value.

Well the answer is that an asset may have no value at all, but if the owner can resell the asset to another person, then that resale value becomes the value of the asset.

So now we have three factors: earnings/yield, growth potential, resale value when it is required to sell.

Please take note that the final component of our valuation formula trumps the others.

Also note that when an asset has zero of the first two, like BTC, and it relies totally upon resale-ability, lets call that desirability among buyers, then it’s value becomes very volatile, and may fluctuate violently.

At this point we need to look very hard at the bond markets.

Yield – very low, almost zero

Growth potential - negative

Desirability – currently ok.

This is interesting, as it places bonds in a similar class as Bitcoin. But bonds are considered stable and safe assets to hold. Therefore, where is the stability of bonds going to go in the future?

Also, the bond markets are beginning to have the odd flash price change. This is surely and early sign, a creeping appearance of something new, a beginning of the new bond environment.

In the light of those considerations, yields are going to rise, as new risk of volatile price change is priced into bonds. Therefore many other assets will change value too. For the moment there are two bond markets. A bond market in which central banks sell their own bonds to themselves, setting the price, and at the side of that market, another parallel bond market in which other buyers buy bonds from the same central banks, or their agents, at prices based upon the price of the first bond market.

Big money is pulling back from bonds. Creation of money – printing of fresh sovereign bonds to be sold back to the sovereign is rife. Monetization of sovereign debt is replacing invested capital.

So who will set the yield against which everything will be valued?

What is gold worth in such a case that yield no longer functions to put a value on assets?

Gold has no earnings, not yield (if one does not lease away). We are left with the desirability among other buyers to acquire that gold as the ultimate factor governing price.

This is called sentiment.

I posit that sentiment is slowly increasing in importance as the key valuation factor for all assets around the globe. This is due to the central banks’ zero interest rate policy moving from it’s original short term, through medium term, and achieving permanent policy status. Teeny micro tapers don't count. And pure sentiment valued objects, you know, things like bitcoin, tulip bulbs, stock in the Mississippi Company, junk ... err ... bonds .... sorry about that ... can alter their values quite dramatically.

So Welcome to the new world of Crowdsourced Central Bank Policy Creation.

We arrived here a while ago, but now it’s gradually becoming increasingly obvious to ... (cough) ... the crowd. If this is correct, then the debt markets will soon develop a certain reminiscent quality which might remind one of the adverts for new cars, or fashion goods. I believe Japan has gotten there already. They are so innovative, leading bravely where the west will follow.

Actually the Japanese Ministry for Finance got to that point THREE YEARS AGO. And since then gold, priced in Japanese Yen has never fallen below the price as of that time, even despite the bearish period for precious metals from 2011 through 2013.

Now just because I see similarities between a country's bond market which depends upon emotive selling points for sovereign bonds and a rising price of gold in that country's currency, does not make this true for everywhere. (Though it might turn out that way.) For instance a different country might take the view that marketing like that would not work among it's subjects. They might prefer to, say, put retirement funds into government bonds by legislated mandate instead, or something like that.

A Wonderful Wall St opportunity

In the circumstances, we might need a new chart to work our analysis upon in future years. This would be the LongBond:Cryptocurrency Conversion Rate. They are such similar assets, it's sure to be all the rage. Everyone will want to switch between them and back again. Think about the derivatives opportunities and the massive profits for the early birds! Think of the Paris shows! The movie rights! Jamie Dimon's pals will want to buy the patent rights! Every pension fund on the planet can be stuffed full of them! There's gonna be a Bond-CryptoFX ATM machine on every street corner. We'll all be so rich!!

And remember, you read it here first! :-)


Argentus Maximus

The author posts daily commentary on the gold and silver markets in the TFMR forum: The Setup For The Big Trade. More information about the author & his work can be found here: RhythmNPrice.

About the Author

Does Feb19 Comex gold close above $1250 on Friday?
Total votes: 183


treefrog · Feb 16, 2014 - 2:35pm



this reminds me of the logic behind "the dogs of the dow" trading strategy.


WineGuy · Feb 16, 2014 - 2:52pm


In the spirit of the Olympics!

Mammoth · Feb 16, 2014 - 3:06pm



Silver, not bronze. 


And of course, what would porn be, without a view of the back side as well?

For those Franklin Half aficionados - note the sexy, full bell lines!

Mammoth · Feb 16, 2014 - 3:27pm


Always thought folks calling out their position on a new thread was silly.

But this time its different.

Here's some 'silver-porn' to make this post worthy of viewing...

foggyroad · Feb 16, 2014 - 3:30pm

a sixth sense

A.M, well done.

lol, mammoth re. backside

AlienEyes · Feb 16, 2014 - 3:51pm

5 th

I'll take the fifth.

Another great post by the way.

Marchas45 · Feb 16, 2014 - 4:01pm

Seventh Heaven

Great Read, argentus maximus some of it went over my head but I'm learning. keep Stacking

P.S. Mammoth why are you following me around'

chocolatechiphorses · Feb 16, 2014 - 4:32pm





Bollocks · Feb 16, 2014 - 4:53pm
Bollocks · Feb 16, 2014 - 5:07pm

Here's a great documentary

Listen from 1.05 to 3.50 to get a taste (it's 2hrs 40mins long).

"Zeitgeist: Moving Forward is a feature length documentary work which will present a case for a needed transition out of the current socioeconomic monetary paradigm which governs the entire world society."

Bollocks · Feb 16, 2014 - 5:57pm

Ye gods!

Just noticed that Bitcon is now around $250 surprise.

4 days:


But but but, it has intrinsic value, right?

Marchas45 · Feb 16, 2014 - 6:05pm

No but it's only Mt. Gox Most

No but it's only Mt. Gox Most others are up around the $600 if that means anything. Keep Stacking

Lamenting Laverne · Feb 16, 2014 - 6:11pm

@ Argentus & SilverRunNW

Very nice reminder of the interconnectedness mechanism. 

It is said that negative yields in real terms is positive for Gold. You say that Gold will not make its real move until Bond Yields start moving up in earnest. I understand this to be the case because the loss of capital in all the interconnected markets will prompt a flight to the no-counterparty-risk asset. Is this rationale understanding correct? We also know that the Volker-interest-hike took the wind out of the Gold sails in 1980 (at least on the surface - because I believe that a certain newly established European gold pool was playing a part too - see link below) so here is my question: What level do you think bonds must go to in yields before this will stop being beneficial and start to have an adverse effect on Gold. Do you have any fixed parameters or threshold you will be watching for? The link below, I promised to find quite a while ago mentions the fact that in 1979 a large amount of CB-gold was swapped into a central pool, and it was not returned until just before the transferral to the ECB in 1999. That is how I read it anyways. @ SilverRunNW - I meant to answer back then, and sorry that it took so long ;-)
Bollocks · Feb 16, 2014 - 6:19pm

Oh right Marchas45

So a crypto-currency measured in US dollars is worth more than twice as much at one exchange than at another?

If that doesn't set all possible alarm bells ringing then nothing will. Wow, just look at what you've said.

Safety Dan · Feb 16, 2014 - 6:24pm

U.S. Plunges To 46th In World Press Freedom Index... Below Roman

May I remind all of us, freedom isn't free.. As you might expect, the economic decline of a nation into rule by a handful of corrupt oligarchs will have many other negative repercussions. One of these is a loss of civil rights and freedoms that many of us have taken for granted. Reporters Without Borders puts out their Press Freedom Index every year, and the 2014 ranking came out today. It was not a good showing for the USSA. Specifically, the U.S. registered one of the steepest falls of all nations, down 13 slots to the #46 position. As the screen shot shows, just above Haiti and just below Romania.

treefrog · Feb 16, 2014 - 6:26pm

netdania tonight!

Bob Dylan - Knockin' On Heaven's Door (Unplugged)
metalsbyamile Bollocks · Feb 16, 2014 - 6:27pm

Bollocks if that was true

which it aint the arbitrage trade would be the road to riches with ButtCoin.

No one will pay should you try it and this alone tells you it's not a viable method of trade.

The Big Forex market players would end this spread in a nano second if it were not so as spreads between bitcoin would tighten immediately to end the wild profits of arbitrage.

I'm with the nay buttcoin. Tulips and bridges anyone.

Hunt brother · Feb 16, 2014 - 6:32pm

Bitcoin crash....counterparty risk does matter!

Gold has no counterparty risk.

I remember the day about two months ago when the bitcoin price was the same as gold at $1200. This madness lasted one day. 2013 was a crazy year.

On Dec. 29, 2013, I bought Canarc for less than a nickel. I bought a lot of Canarc, my father bought a lot of Canarc, my brother bought a lot of Canarc.

Somebody sold us their Canarc for a nickel! Fools.

Bollocks · Feb 16, 2014 - 6:38pm


exactly. yes

· Feb 16, 2014 - 6:40pm

The present strategy is to

The present strategy is to herd capital into the desired place.

And it's all about funding big government.

So defense of the bond markets can be assumed. But they are so overborrowed, that the natural defense, a rise in interest rates is unpalatable to government.

Therefore it becomes about raising the perceived real interest rates to where they are positive and appear to cover the sovereign default risk. Viola! problem solved.

1 Depress official inflation metrics

2 Suppress all information about sovereign fragility

3 Enhance the yield paid, by depressing alternative asset yields, like eg money deposits offered by banks, LIBOR, etc

4 Work similar strategy in correlated markets, repos, etc top prevent adverse comparison of yields

5 All new money creation as covert as possible, and suppression of information about it

6 Generate confidence so that adverse information is ignored by market participants


Is there anything above they are not doing to their greatest capacity? I may have missed some components, but the broad structure is outlined.

The weakness as I see it is (1) the natural swings in sentiment, whereby at certain times market participants will just change their mind. (2) an outbreak of war or conflict, though constant low level worry about impending conflict actually aids the suppression of inflation (3) Energy producing countries unite and charge more for their product exported, as in the 1970s oil crisis, note Saudi diplomatic isolation, Ukraine-Syrian pipeline gunboat diplomacy (4) natural disaster reducing agricultural production and the price of foodstuffs. (5) unexpected catastrophe which adversely affects sentiment contra their desired direction for some reason.

My piece was twofold:

firstly a sarcastic comparison between bond promises to repay made by insolvent governments who pay zero interest on those bonds, and non existent crypto currencies whose value fluctuates wildly due to having neither growth nor yield.

secondly a reminder that when sentiment determines the value of something (like eg a low value of gold last year to now) then remember that sentiment is a changeable thing, and bear markets and bull markets which lead to extreme prices eventually all have endings.

So It Goes · Feb 16, 2014 - 6:40pm

Mammoth - silver porn

Nice. How about these? The original design for ASEs. Ah, walking liberty - what a concept - liberty - maybe it made sense back then.

Walking Liberty Half-Dollar - ObverseWalking Liberty Half-Dollar - Reverse

ag1969 · Feb 16, 2014 - 6:46pm

High School Argumentative Essay

Good weekend Turdville! Just wanted to let everyone know that we have a guest author over in the Healthy Food Forum today. Mr. Fix's Daughter has shared an essay she wrote on GMO food. For those of you who have lost faith in the people, you will find it refreshing that such great work can still be found in our youth:

I would love to be a fly on the wall when the teacher reads this!

Save_America1st · Feb 16, 2014 - 6:51pm

Nice start...

Nice little start for the PM's so far tonight...

paper gold up $4.70 and paper silver up $0.14 so far

Marchas45 · Feb 16, 2014 - 6:56pm


Maybe I'm wrong but they are different exchanges and different prices and I'm not into Bitcoin. Check them out. Also MT GOX is in deep shit.

metalsbyamile · Feb 16, 2014 - 7:17pm

China forbid the bitcoin for

China forbid the bitcoin for a reason. All countries dominate control of their currency.Bitcoin circumvents this in so many ways , too many to list.

For the consumer bit coin creates other problems, the least of which is fluctuation of value to the extreme.You transact a exchange of $100 USD in Bitcoin to find the next morning your value has decreased $50.

With Bitcoin, if you send your money to a questionable vendor, there is no recourse to get a refund. There is no guaranteed system to see your electronic monies returned. Your funds are gone once they are gone, permanently gone. It requires active participation from the vendor to reverse a transaction—and that's not always an option.

With Bitcoin as mentioned above, the sender and receiver each take on exchange risk in this process.

And that is why you can not and will not ever be able to arbitrage the bitcoin.Bitcoin exchangers would never pay.

This is pure speculation to the extreme, and unlike currencies as much as we dislike them,is not sanctioned by the money printers of the world.

The race to the exits will be a sight to behold.

Save_America1st · Feb 16, 2014 - 7:19pm

The monkeys...

Looks like the monkeys are working overtime and early tonight. They obviously had to step in before the PM's quickly got outta hand. I'm sure without the manipulation standing in its way, gold could run away very quickly and break 1400 by tomorrow.

Mammoth Marchas45 · Feb 16, 2014 - 7:36pm

re: Seventh Heaven

Au contraire M45, click on my profile to see how long I've been in Turdville.

(Besides - I was second and you are seventh - so who is following who around?)

Marchas45 · Feb 16, 2014 - 7:44pm



Bollocks · Feb 16, 2014 - 7:44pm


You miss my point. Ok, so perhaps you think that bitcon can be bought at one place at a certain price and elsewhere at less at half that price? Doesn't that reveal that something is seriously wrong with it and the exchanges that sell it, and the whole system that supports it?

Bitcon is a perfect example of intellectual materialism. It has no intrinsic value.

Hunt brother · Feb 16, 2014 - 7:49pm

The Chinese man at the health club..

My Chinese friend from the gym decided that waiting for $1000 gold was a mistake and he locked $1320 this afternoon with an online purchase.

When do Jim Rogers and Martin Armstrong retract their $950 gold price forecast?

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