Gold Starting Stage 4 Decline and What It Means for Investors

Passive Buy and Hold Investors in General are Starting to Panic: XLU, Dividends, Bonds

It has been an interesting year with stocks down nearly 25% and the bond ETF TLT down over 40% since the 2020 highs. The passive buy and hold investor is becoming panicked and we can see this in the stock market through the mass selling of utility stocks dividend stocks and bonds.

When the masses become fearful they liquidate nearly all assets in their portfolios which is why we see the Big Blue chip stocks selling off along with precious metals. As investors liquidate around the world they focus on where their money can be preserved. With most currency falling in value there is a flood towards the U.S. dollar index as the safety play.

Gold Video Analysis

Here you can watch my detailed analysis along with both my short-term expectations and long-term supercycle outlook.

Global Currency Trends – Monthly Charts

As the US dollar index rises we tend to see precious metals fall. As you can see from the charts below almost all currencies are falling in value helping to send the US dollar index sharply higher this is a headwind for precious metals until it finds resistance in tops.

Gold Monthly Chart Comparing 2008 Bear Market and 2022

Let’s take a look at the monthly chart of gold. I believe gold entered a new bullish supercycle in 2019, which is very similar to the Super cycle that started in 2001.

I believe the bear market in equities we have started can be compared to the 2008 bear market. Technical analysis shows that gold could correct another 16% lower and match the same 34% correction we saw in 2008.

The price of gold is threatening the 1674 support level. If price is broken on the monthly chart it will signal a large sell off to roughly the $1300 to $1400 level for gold.

While the circumstances and economy are very different from 2008 the price charts are painting a very similar picture. I believe there’s still a long way to go for gold to find support and it may take another 8 to 12 months to unfold. I also believe that the precious metal sector will be one of the first assets to bottom and then start a multiyear rally very similar to what happened during the 2009 to 2011 rally.

While the 34% correction starting to take place may look very large it is in line with what we’ve seen in the past. While price charts don’t repeat they do tend to rhyme so I’m expecting a similar type of scenario though I’m sure it will unfold a little differently and take a different length of time to mature.

Price Stage Analysis – Gold Starting Stage 4 Decline

The price of gold is on the verge of breaking down from a stage three topping phase. Once the breakdown is confirmed it will then be in a stage 4 decline which is known as a bear market. It’s important to note that we can have bear markets within supercycles.

Just like when gold started at new super cycle in 2001 which lasted to 2013 there can be large corrections and smaller bear markets within the bullish Super cycle.

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Dollar Index Rockets Higher and Has More Room to Run

The US dollar Index has been one of the hottest assets to own this year. I believe the rising value of the dollar index has been putting downward pressure on the metals sector all year. As you can see from the quarterly chart below, The US dollar index still has more room to run to match the high set in 2001.

Keep in mind I still think there’s another three to five more bars before the dollar forms a top and reverses direction. Each bar on the chart is 3 months because this is the quarterly chart so we still have potentially a year of sideways or lower gold pricing ahead of us.

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Gold Miners Will Be Under Pressure If Gold Falls

If gold breaks down and the bear market in equities continues, we will see gold mining stocks continue to sell off. The large cap gold stocks ETF GDX shows a potential of 44% decline in price over the next year. While this may sound bad it will become an extraordinary opportunity in do time.

I believe silver and silver mining stocks will follow that of gold stocks as well.

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Concluding Thoughts

In short, I’m very excited for what is unfolding in the precious metals sector. And while it may still be early I’m keeping my eye on the sector for the start of a new super cycle rally in 2023 which could be life changing for investors.

TheTechnicalTraders created the Consistent Growth Strategy that can be manually followed or autotraded in a self-directed retirement account for people who do not want to spend their valuable time in front of a computer. Save time to do what you love and lower stress to enjoy every moment of today.

Chris Vermeulen
Founder & Chief Investment Officer
www.TheTechnicalTraders.com

Disclaimer: This article and any information contained herein should not be considered investment advice. Technical Traders Ltd. and its staff are not registered investment advisors. Under no circumstances should any content from websites, articles, videos, seminars, books or emails from Technical Traders Ltd. or its affiliates be used or interpreted as a recommendation to buy or sell any security or commodity contract. Our advice is not tailored to the needs of any subscriber so talk with your investment advisor before making trading decisions. Invest at your own risk. I may or may not have positions in any security mentioned at any time and maybe buy sell or hold said security at any time.

The Worst Case Scenario for Retired or Nearly Retired Investors Who Are 55+

I just did some research and wrote about it. I should be clear that you may find this article a little unsettling if you are nearing retirement or have already retired. On the other hand, it’s an eye-opener because the financial markets and different asset prices paint an interesting picture.

But, I believe being armed with the proper information and knowledge leads to better outcomes, so I’m sharing this possible scenario that could unfold in the next 3-10 months and last for many years and directly affect our lifestyle.

If you don’t take proper action, you could be exposed to and experience something called the sequence of returns risk, which I will explain in great detail in my soon-to-publish white paper. So, let’s jump into things!

There is a concept that the US Fed may be pushed into raising rates above nominal inflation rates to stall inflationary trends. Historically, the US Federal Reserve had raised rates aggressively to near or above annual inflation rates before the US economy moved away from inflation trends.

The Potential Scenario As Told By The Charts and History

Suppose US Inflation trends continue to stay elevated throughout the end of 2022 and into early 2023. In that case, the US Fed may continue to raise Fed Funds Rates (FFR) to unimaginable levels more quickly than many traders/investors consider possible. Could you imagine an FFR rate above 6.5%? How about 8.5%?

What would that do to the Mortgage/Housing market? How would consumers react to credit card interest rates above 24% and mortgages above 10%? Do you think this could happen before inflation trends break downward?

The reality is that the markets and future have a way of surprising us and doing what we once thought was not possible. So being open to some of these extreme measures and situations is something we should consider and consider what they could do to our businesses, lifestyles, and retirement.

Historically, this must happen for the US Fed to break the persistent inflationary trends in the US – take a look at this chart.

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The best-case scenario given the historical example is that Annual Inflation trends move aggressively to the downside by Q1:2023 or earlier. That will allow the US Fed to move away from more aggressive rate increases, which could significantly disrupt US & Global asset markets (pretty much everything).

Suppose Annual Inflation stays above 6~7% throughout the end of 2022 and into early 2023. In that case, I believe it is very likely the US Federal Reserve will be pushed to continue raising rates until a definite downward trend is established in inflation.

Algos, Illiquidity, Derivatives Are Active Culprits

There are two examples showing the US Fed acted ahead of a major downturn in inflation: one in the late 1980s and another in late 2007. Both instances were unique in the sense that the late 1980s presented similar sets of circumstances. Computerized trading, illiquidity, and excessive Derivatives exposure prompted the 1987 Black Monday crash and the 2007-08 Global Financial Crisis.

Current Stage 3 Topping Pattern May Turn Into Stage 4 Decline

My research suggests the US markets are fragile given the current Inflationary trends and pending Federal Reserve rate increases. As I told above, the best-case example is to see Inflation levels dramatically decline before the end of Q1:2023. It is almost essential that current inflation levels drop back to 2~3% very quickly if we are going to see any measurable slowdown in Fed rate increases.

Secondly, the continued speculation by traders/investors remains very high, in my opinion. Given the historical example, traders should be pulling capital away from risks very quickly and attempting to wait out any potential Fed rate decisions. Below, I’ve highlighted where I believe we are on the Stock Market Stages chart. This is not the time to become overly aggressive with your retirement account/nest egg.

Many traders and investors are now buying this pullback in stocks, thinking it’s a buy-the-dip type of play. I think things are about to get ugly, and what we have seen thus far in 2022 is just the 12-year bull market ending, but the downtrend has not even started yet.

The time to buy the hottest sectors, like in 2020, will eventually come, and when it does, the Best Asset Now strategy can generate explosive growth for traders, but now is not the time.

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Proprietary Investor Strategy Confirms Cycle Trends

My proprietary Technical Investor strategy has moved into GREEN trending bars – aligning very closely with the MAGENTA ARROW on the Stock Market Stages chart above. I’ve drawn both a GREEN & RED arrow on this chart to highlight the potential trending outcomes that likely depend on how quickly Inflation levels drop.

If Annual Inflation levels drop below 3% before we start Q2:2023, then I believe we may see a softer US Fed and more significant potential for a recovery in the US/Global markets over the next 18+ months.

On the other hand, suppose Annual Inflation levels stay above 6~7% over the next 6+ months. In that case, I believe the US Federal Reserve will attempt to continue to raise rates aggressively – eventually resulting in a “bear market” breakdown event in the US/Global asset markets.

Comparing 2008 Bear Market Breakdown With 2022 Price Action

The last time we experienced a major Inflationary event where the US Federal Reserve was not actively supporting the US economy with QE policies was in 2007-08. This event prompted a -57% decline in the SPY before bottoming out and a -55% decline in the QQQ. Many of you lived through that market collapse and have strong feelings about how destructive that move was for everyone.

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2022 Bear Market Breakdown

This time, after 12+ years of QE, prompting the “Everything Bubble,” – just imagine what could happen if my research is correct. But let me be very here. I am not forecasting, predicting, or saying this will happen. I do things differently when it comes to trading and investing. I only own assets and hold positions that are rising in value. I do this by following price charts and managing risk and positions.

You won’t ever catch me trying to pick a bottom, averaging down into losing positions, and you won’t find me trying to pick a top, either. What you will experience if you follow my work is that I always research and know all the possibilities an asset could move, and I plan to navigate each one safely. Once the price charts confirm a direction, I position my portfolio to profit from the new trend, which can be up or down.

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A Tough Year Even for Experienced Investors

This year alone, the S&P 500 is down over 18%, and treasury bond ETF TLT is down 28%. As a result, anyone investor using the buy-and-hold strategy with any mix of stocks/bonds in their portfolio is under tremendous pressure and likely starting to worry about outliving their retirement funds.

Here is a little background on the market markets for you. First, there have been 26 bear markets since 1929, with an average loss of 35.62 percent and an average duration of 289 days. Mind you, some of those bear markets were only a few months long, while others were multi-year declines, with some taking 5, 12, and even 17 years to return to breakeven.

But the reality is breaking even with your assets is still a significant loss. After many years of being in a drawdown like that, don’t forget you are paying 0.50% – 2% annual fees from ETFs, mutual funds, and possibly advisor fees. Simple math shows that with a 17-year drawdown spending 1+% year to hold these losing positions, you still have a 17+% loss when assets return to breakeven because of these costs.

I know all this sounds bleak, and rightly so, it is. But there is good news. Market corrections and bear markets can be identified early and safely navigated if you know what to look for and follow the market VS. buy and hope, or try to pick market bottoms and tops.

2022 has been a very tough year to make money from the markets, not because of the market decline but because of the stage 3 phase in which the stock market is currently. It does not know if it wants to find a bottom and rally or roll over and start a steep bear market swan dive.

Concluding Thoughts

In short, the world and even more so, the financial markets and assets have a habit of applying the maximum pain to investors before reversing direction. In fact, there is a “Max Pain” calculation in the options market to know where the maximum pain/losses will be for the stock market, and it’s crazy scary how the market will reach this price level during options expiry days on many cases.

The bottom line here is that the worst thing that could happen to most investors and capital in the markets now would be a multi-year bear market and drawdown in the markets, which would cripple anyone nearing retirement and everyone already retired. Having your nest egg cut in half will send shockwaves worldwide to the largest group of investors, the baby boomers, and anyone retired. In addition, it will likely create a flood of people looking for jobs to subsidize their retirement and crush many dreams, and that’s just the beginning of potentially a big unraveling of the economy, I think.

Labor rates will fall as millions of individuals look for work, we will be in a recession, and businesses will be laying off millions of employees, making it even harder to get a job. We are already seeing layoffs taking place. Then we could see the real estate market (residential and commercial) starting to fall apart. Things start to get a little depressing beyond that, so I’ll stop here, but you get my gist, I hope.

The average investor is positioned for higher prices with the buy-and-hold strategy. The critical thing I am trying to share with you is what could happen on the downside if things continue to erode and that you should think about how your lifestyle could change in the next 3-10 months if/when this happens and if you think you will be comfortable with your situation.

Every week I remind investors I work with that now is not the time to expect to make money. Instead, it is about capital preservation. Focus on not losing; growth will naturally come in due time.

If you have any questions, my team and I are here to help you safely navigate both bull markets and bear markets with our CGS Investing Strategy.

Chris Vermeulen
Chief Investment Officer
www.TheTechnicalTraders.com

Disclaimer: This and any information contained herein should not be considered investment advice. Technical Traders Ltd. and its staff are not registered investment advisors. Under no circumstances should any content from websites, articles, videos, seminars, books or emails from Technical Traders Ltd. or its affiliates be used or interpreted as a recommendation to buy or sell any security or commodity contract. Our advice is not tailored to the needs of any subscriber so talk with your investment advisor before making trading decisions. Invest at your own risk. I may or may not have positions in any security mentioned at any time and maybe buy sell or hold said security at any time.

Asset Price Deflation

Most financial assets benefited enormously from the Fed’s hugely gratuitous efforts to support, sustain and reinflate prices after the 2020 collapse and the ensuing forced economic shutdown.

From the article Gold Market Manipulation And The Federal Reserve

Long-side investors in all assets, including precious metals, ‘benefited’ from the manipulative efforts of the Federal Reserve twelve years ago and again just recently.

The recent recovery in prices for stocks, bonds, oil, gold, and silver has been almost unbelievable. It is literally jaw-dropping…” June 28, 2020

It’s kind of hard to believe that I wrote those words two years ago. A lot has happened since then. It isn’t an understatement to say that whatever superlatives were used to describe the situation at that time probably should have been saved for what came afterward.

For example, gold surged to more than $2000 oz in August 2020, and came close to breaching that level again earlier this year.

Stocks increased more than fifty-five percent by the end of the following year and the widely-followed popular cryptocurrency, Bitcoin increased nine-fold from 9000 to 64,000.

Housing prices seemed to have no upside limits and commodity prices increased by one hundred sixty-six percent.

It’s All Over Now

That was then and this is now. Here are some charts to look at…

GLD (Gold ETF) 1-YEAR

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In less than four months, the gold price has dropped more than sixteen percent.

SPX (S&P 500) 1-Year

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After reaching all-time highs at the end of last year, stock prices have fallen twenty-five percent.

BITCOIN (CME Futures) 1-Year

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The award for most breath-taking price drop so far goes to Bitcoin. That shouldn’t be a surprise to anyone. The most widely-watched cryptocurrency has fallen from 69,355 last November to a recent low of 18,525, a drop of seventy-three percent.

TLT (Long-Term US Treasury) 1-Year

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Long-term US Treasury bonds have dropped by thirty percent since December.

The Most Significant Chart

Any one of the above charts might be considered as important, or significant, but I believe that a variation of the Long-term US Treasury Bond chart is deserving of further consideration…

TLT (Long-Term US Treasury) 3-Year

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The big push to keep interest rates down and reinflate asset prices didn’t do much for bonds.

The reversal point in a multi-decade decline in interest rates came in the summer of 2020 and bond prices have been declining since.

The decline grows in significance because it is larger and longer than in our previous example. From peak prices in August 2020, long-term bond prices have declined by forty percent.

There is additional significance in the fact that the rise in interest rates and corresponding decline in bond prices began while other assets were still in streak mode to the upside.

Investors were looking for the next big thing and the rocket fuel provided by the Fed for everyone’s favorite moonshot seemed to be working.

Rush for the Exits – Conclusion

Then the Fed said that while it would still continue to provide rocket fuel (expanded credit), it was going to raise the price for the fuel by pushing interest rates higher.

Push turned to shove and the bond market fell down the “stairway to heaven”.

The reverberations were felt in surrounding crowded theaters and participants headed for the exits.

That rush for the exits brings us to where we are now. Expect another wave of selling to occur. It will include forced liquidations of leveraged positions in all markets as well as mass selling out of discouragement and despair.

Things are going to get a lot worse. The ultimate fire sale is underway. (also see A Depression For The 21st Century)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Interest Rates Could Double/Treble Again

Interest rates increase

The steady increase in interest rates coupled with references to inflation has some people scratching their heads. Not surprising. The two don’t necessarily go together. For now, let’s see if we can add some perspective to interest rates.

Let’s start with a text message I received last week about mortgage rates…

High mortgage rates

Dad, I am in a national sales meeting. We are discussing inflation. What were mortgage rates in 1981?” 

I responded with a message that average annual mortgage rates in 1981 peaked at 16.63%.

That might be something to keep in mind when you read a headline that refers to the recent horrific increase in mortgage rates.

Yes, mortgage rates have increased sharply. For all of 2021, the average rate was 2.65%. We are six months into 2022 and mortgage rates have doubled. The current rate is 5.36%.

That is a huge percentage increase, but is it unreasonable? Depending on the context in which it is viewed, maybe not.

Bond prices

Over the same six month period that has seen mortgage rates double, the interest rate on the US Treasury 20YR bond has risen from 2% to a recent 3.45%, an increase of seventy-two percent. The corresponding decline (twenty-eight percent) in the underlying bond price is pictured in the chart (TLT ETF) below…

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Below is the same chart over the past three years…

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The decline in bond prices (and rise in interest rates) has been in force since early 2020. From a low of just over 1% in the summer of 2020, the interest rate on the US Treasury 20YR bond has more than tripled (1.06% to 3.45%) and the underlying bond price has declined by thirty-eight percent.

Long-term interest rates

As in the case of mortgage rates, the increase in long-term interest rates has been swift and significant. Yet, as we saw with mortgage rates above, some additional perspective can help.

Between 1971 and 1980, interest rates climbed to mind-numbing levels. The benchmark 10-year US Treasury Bond yield increased to a high in excess of 15%. 

With long-term treasury bond rates at historical highs and mortgage rates at 16%, how does that compare to where we are now? Are today’s high rates so horrific?

Of course, the systematic risk is there, but it has been all along. Percentage-wise, a rise in interest rates from 1% to 3% isn’t different from a rise from 5% to 15%. It is a matter of perspective.

And since the financial system and world economy are dependent on cheap credit, the ultimate cataclysmic event could come at any time.

The historic (centuries-old) average annual (all-inclusive) interest rate through the end of the twentieth century was approximately 8%.

Given that, is a 30-year mortgage at less than 3% reasonableOr, are interest rates at 15% in 1980 any more unreasonable than interest rates of 1% in 2020?

Conclusion

Interest rates have risen sharply of late. But they are only a fraction as high as interest rates forty years ago.

The world economy’s dependence on cheap credit has reached addictive proportion. The increase in interest rates heightens the systematic risk.

Nevertheless, the potential for much higher interest rates is great. At a minimum, interest rates would have to more than double from their current levels just to get close to long-term historic averages.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Bonds Not Reflecting Risks Like They Usually Do – Where’s The Beef?

I’ve been paying close attention to Bonds as the global markets react to rising inflation and global central bank moves recently. The US Federal Reserve has yet to take any actions to raise rates, but we all know it will come at some point. Longer-term bonds are acting as if these risks are much more subdued than many traders/investors believe – which has me questioning if global central banks have overplayed the stimulus game?

Why would traditional safe-haven assets fail to act in a manner that reflects current market risks like they would typically do? Why have precious metals failed to reflect these risks also properly? Is there something brewing in traders’ minds that are muting or mitigating these traditional safe-haven assets?

Bonds Continue To Slide After COVID Rally

This table, reflecting the recent downward trend in Bonds, highlights the weakened safe-haven tendencies. These assets would generally present with rampant inflation and the possibility of multiple Fed rate increases.

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(Source: SeekingAlpha.com)

Increasing uncertainty throughout the globe, and as inflation climbs to the highest levels since the mid-1970s and 1980s, – “where’s the beef?” (to reference a 1980s Wendy’s commercial phrase).

This TLT Weekly chart shows how risks climbed when COVID hit in February 2020. Yet, take a look at how price has consolidated below $156 and has continued to trend lower over the past six months.

After a brief move higher, to levels near the $147 to $155 level, TLT has moved decidedly lower over the past 6+ months. This downward price trend illustrates the diminishing fear levels as traders piled into the post-COVID rally phase. This move suggests traders believe inflation may be temporary or that the US Federal Reserve has room to raise rates without disrupting the global economy. I think the current premise and price trend in TLT vastly underestimates the amount of disruption a series of Fed rate hikes would cause the international markets.

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The US Federal Reserve will likely consider all options before taking an aggressive move to raise rates. Additionally, the US Fed may decide to allow foreign central banks to move more aggressively to raise rates while it decides to take a more measured approach to inflation.

The key to future rate increases is how supply chains open up and how consumers continue to engage in economic activities. Any sudden shift by consumers, or further disruptions in supply for manufacturing and consumer staples/discretionary items, could prompt the Fed into taking aggressive actions.

From where the Fed Funds Rates currently are, a move above 0.50% would reflect a +500% rate increase. This may prompt some type of “pop” in certain asset bubbles.

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(Source: St. Louis Fed)

Traders should stay keenly focused on market risks and Bond levels throughout 2022 into 2023 as any sudden shift away from current trends could spell trouble. Right now, Bonds are pricing in minimal risks – which may be a mistake.

The market dynamics and trends are changing from what we have experienced over the past 40 years for stocks and bonds. The 60/40 portfolio is costing you money now, and bonds can’t keep up with inflation and are more or less yield-less.

The only way to navigate the financial markets safely, no matter the direction, is through technical analysis. By following assets and money flows, we identify trend changes and move our capital into whatever index, sector, industry, bond, commodity, country, and even currency ETF. By following the money, you become part of new emerging trends and can profit during weak stock or bond conditions.

What Trading Strategies Will Help You To Navigate Current Market Trends?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase. This may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

I invite you to learn more about how my three Technical Trading Strategies can help you protect and grow your wealth in any type of market condition by clicking the following link:   www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

 

TLT: Making a Parallel with 2018/2019 Points to a Temporary Upside for This Long Duration Bond ETF

During the week ending January 21, 2022, both the NASDAQ and S&P 500 were down by 5% and 3.9% respectively as shown in the charts below, while the Vanguard Total Bond Market (BND) was up by 0.72% showing investor preference for fixed-income over equities. More important, the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) as shown in green below was up by a whopping 2.52%.

Source: Ycharts

Now, as its very name suggests, TLT seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years. In short, it provides exposure to long-term U.S. treasury bonds.

Why invest in TLT

Quoted on the NASDAQ, TLT aims to replicate the performance of the ICE U.S. Treasury 20+ Year Bond Index. The fees for the ETF are 0.15% and the total assets under management are around $16.45 billion. There is also a dividend distribution policy encompassing yields of 1.54%. There are alternatives, one of which is the Vanguard Extended Duration Treasury ETF (EDV). This ETF, which I elaborated upon at the end of December, has delivered an even higher one-week gain of 3.33%.

Coming back to TLT, one of the advantages of this ETF is that it captures the long end of the yield curve in a very liquid fund. Thus, for investors who want long-term exposure to the U.S. Treasury, the quality of these bonds makes this ETF a safe haven in times of doubt. For example, during the financial crisis of 2008/2009, TLT rose by 28.3% while the S&P500 suffered a drop of 38.5%. For those who trusted it, TLT again provided portfolio protection in March 2020’s Covid-related market crash due to the fact that it is inversely correlated to the broader market.

Still, adopting a cautionary posture, as from the end of April 2020, when it was evident that the U.S. economy was exiting recession and the S&P 500 started its unrelentless uptrend, TLT started to underperform as investors moved away from the safety of long-duration bonds. Additionally, one should be aware that TLT is very sensitive to fluctuations in long-term interest rates given that it exclusively holds bonds over 20 years old.

For this purpose, extending the time horizon from one week to include 2021and January this year, one will notice that TLT’s share price (in orange in the chart below) moves inversely to the U.S. Treasury 10-year yields in the blue chart.

Source: Trading View

In addition to being interest rate-sensitive, TLT is also impacted by inflation as its yields remain moderate compared to higher yield bonds like BND which pays higher dividends of 2.16%. But, BND, in the same way as the S&P 500 suffered during the March 2020 market crash and in current market conditions, rising rates could overpower coupon returns.

One of the reasons I find TLT to be attractive at this particular moment in time is that it is in some way tied to the strength of the U.S. economy, not necessarily one which is growing at full steam, but rather one which is growing healthily with a balance between growth, on the one hand, and, inflation on the other. It is precisely this economic setup that the Fed is aiming for with the forthcoming normalization of monetary policy. Also called policy tightening, the aim is ultimately to reduce inflation while maintaining a reasonable growth potential.

I now make a parallel between events back in 2018-2019 and 2021-2022, with Jerome Powell heading the Fed during both periods.

Making a parallel with 2018/2019

Back in 2018, the performance of TLT (orange chart below) was highly negative or -10.5% from January to October as marked by the brown circle. However, there was a subsequent strong rebound of +7.7% since the beginning of November 2018, which also coincided with a fall in equity indices.

Source: Trading View

At that time, this was linked to growing uncertainties about the U.S. and global economies. Some of you may remember that the Fed, with Mr. Powell at its helm, remained firm on his intent to raise rates, more concerned about inflation rising than the weakening of U.S. growth.

Well, this is exactly the same today, except for the fact that inflation is already high.

Still, one of the lessons which can be learnt from 2018/2019 is that after 20 months of uninterrupted growth, the market is worried that the U.S. economy could take a pause in the coming months. To this end, the recent upside seen in TLT’s share price suggests that more investors are opting for long-term government bonds, which play the role of safe haven at times when the equity market corrects sharply.

Now, given the uncertainties, some of which revolve around the number of rate hikes, their economic impacts and what would be the market reaction, TLT may deliver a sustained upside. However, this will not be to the same degree as observed in 2018/2019 when there was a 25% upside over six months (the difference between the blue and brown circles). Moreover, contrary to 2018-2019, the consumer price index (CPI) is much higher today.

Pursuing along the same lines, TLT’s performance will also depend on how the markets digest the news during the forthcoming meeting of the Fed’s policymaking arm. That first meeting for 2022 is scheduled for January 25-26 and on Wednesday, Mr. Powell will conduct a press conference in what is expected to be the biggest such event since expectations about interest rates rising emerged. Consequently, we can reasonably expect long term bonds to continue performing well, at least till Wednesday.

Finally, TLT can be considered to be very useful as part of a risk-limitation strategy to mitigate for volatility in the equity market during periods of strong turbulence, but, for long term investors, it is important to note that it works better during periods of low inflation.

Disclosure: This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.