Ed Yardeni - Bond Vigilantes

If the intermarket picture of selling the small cap stock to parry against the rising trend in the TLT makes sense, then what you would be hoping for if you own GBN.V shares, is a sharp decline back to trend in the bond ETF price.

Bond markets however, have been relentlessly self-supporting throughout the financial crisis, which was counter-intuitive to the general wisdom that interest rates have to rise. It should come as no surprise that inflation is actually going into the bond prices, thus lowering the yield. (That's not to suggest that the point of view holding that the commercial sector was shooting fish in a barrel by crashing the mining stocks after Bre-X and continued to drub the price on any advance since 1997.)

So you would entertain any cogent discussion on U.S. bond markets, and to some extent, Canadian bond markets. Very likely the trade to sell the small cap miner struggling to exist and reap gains out of virtually risk free rises in the bond market composite index represented by the TLT will continue to be in vogue as long as the majority of dollars printed goes straight into the bond market.

What might throw a wrench in the works, forcing commercial traders to reverse their bets would be a sharp decline in the value of the dollar. This might be in the works, since short term interest rates are calamitously close to falling into the negative. Operation Twist was designed to fend off such an eventuality, so it buys some time. (The Swiss banking gnomes notably reversed their earlier decision not to act against an appreciating CHF when their short term bonds showed negative nominal rates up to the 2-year treasury.)

In the meantime, at the very small cap end of this formidable hurdle, trading at an obvious disadvantage, GBN.V continues to produce gold and will see a profitable quarter for Q2 fiscal 2012.(we are in Q3 right now.) Paying out dividends was not unusual for a miner during the depression after the stock market crash in 1929 as soon as they were able.

The case for paying out a dividend for a mining project with a robust grade, starting at the outcrop not long after startup is as robust as it is was back then as it is now, because, the fact of the matter is that GBN.V, whether you like it or not, is in direct competition with the largest, most liquid market.

http://www.bloomberg.com/video/80778192/