Bonds Take a Beating

The bond market has taken a beating in the last couple of days.  Interest rates have gone up quite dramatically over just a 2 day period and mortgage rates are following.  This is ironic, considering the fact that Bernanke's reasoning for QE2 is to lower interest rates.  Rates have gone up since his announcement of QE2.

I have been saying that for gold to go to the moon, interest rates would have to start rising.  It's not that high interest rates cause gold to go higher, but there should be some correlation if gold starts to rise dramatically due to price inflation.  It has been a battle between gold and bonds up to this point.  Both did poorly today. Bonds have been telling us that there is little to worry about as far as inflation because rates have been so low.  Gold has been rising, which is possibly telling us something different.

I think for gold to go to $2,000 per ounce or more, interest rates are going to rise.  This is not to say that you should wait to invest in gold until rates rise.  You should be significantly invested in gold or gold related investments now.  But again, for gold to really go sky high at this point, we need to start seeing some price inflation.  You may see a little price inflation at the gas pump and the grocery store, but the bond market has been telling us that it is not a significant threat in the future.  I think the bond market is finally waking up to the reality.

With all of that said, I would not short the bond market at this point.  If you do, you should know that it is a total crap shoot.  Bernanke has barely started QE2, if at all.  QE2 means the Fed will be buying bonds.  Although it means the Fed will be inflating the money supply (despite what Bernanke says) which could ultimately be negative for bonds, for now the Fed will be bidding up bond prices.  It's not to say that the Fed will be successful in driving down rates in the short term, but I wouldn't bet against the Fed at this point either.