Less Than Zero
By Adrian Ash
November 17, 2007
US Treasury bonds are no
'safe haven' investment; they're now a sure route to destroying
your wealth...
IT'S BEEN A TOUGH couple of weeks for anyone Buying
Gold just below its all-time record high of $850 per ounce
in early November.
By lunchtime on Thursday 15th, the Gold
Price had dropped almost 8% from its 27-year high of $849 of
only seven days before.
Even long-term gold investors, most especially
those gold buyers who climbed aboard below $300 per ounce,
couldn't help but wish they had taken a little money off the
table.
After all, a profit's not a profit until it's
safely in your pocket. Not unless you're Goldman Sachs
"marking to model" its mortgage-bond profits, that is.
But the latest gold buyers can't even pretend
they're in profit just yet. Should they quit now? The last
blow-off top in Gold
Prices – the spike of May 2006 – cost new buyers 20% of
their investment inside six weeks. At today's prices, that would
take us back to $680 per ounce.
Five months later, in Oct. '06, those gold buyers
stood one-fifth short of break-even once more. And it took until
Sept. this year to regain that of May '06 at $725 per ounce.
Could you afford to sit on a loss in gold –
earning zero per cent interest and actually paying for storage
and insurance – until Feb. 2009...?
Here at BullionVault,
we don't pretend we can see the future. We enjoy blackjack and
bridge far more than tarot. But in lieu of tea-leaves and
crystal balls, we do like to study the past.
Because if you won't study history when you're
picking your investments, just what do you plan to study
instead? To turn that question around, what else might new gold
investors have chosen to buy in early November that would have
made them a quick profit instead?
US Treasury Bonds: Now the Perfect 'Safe Haven'
The "smart money" of professional and
institutional fund investors is surely shouting an answer.
"Buy Treasury bonds," cry Wall Street and London.
"Buy short-dated bonds and keep buying them...buy! Buy!
BUY! Quick, before the Bernanke Fed hacks away at US interest
rates again, fixing the mortgage market with a fresh dollop of
cheap money!"
But if it's cheap money you want, then it's cheap
money that the Federal Reserve will deliver. And the US Dollar
is now cheaper than it's ever been before in history.
Glancing back at the past once more today, we
wonder what that means for today's eager Treasury-bond buyers...
US government bond yields have now sunk so far, so
quickly, that on Thursday this week – in a little-noticed
event – they slipped below the last reading of US inflation.
Yes, even on the Dept.
of Labor's much-despised Consumer Price measure, the cost of
living in America in October was officially higher than two-year
Treasury yields are today. Two-year yields have dropped by more
than 0.5% over the last month. They're down by nearly 1.5% since
November last year.
But CPI inflation, on the other hand, has risen
from 2.0% in January to above 3.5% in October.
In short, two-year Treasury bonds are now deemed so
desirable – because the subprime mortgage disaster demands
such aggressive Fed rate cuts – that investors are willing to
let inflation destroy their wealth. Or rather, the wealth of
their clients...
And why not? Everyone thinks Ben Bernanke will jump
at the ghost of '30s deflation before he dares shadow-box the
threat of '70s inflation. No doubt everyone's right in thinking
that, too. Bernanke did build his career – first as an
academic, and now as the world's chief central banker – on the
promise of preventing the Great
Depression more than 50 years after it ended.
And just maybe Bernanke is right, too. Maybe the
housing slump – and the resulting loss of consumer spending
– really do threaten such an ugly unwinding of US debt, the
economy will slip into deflation. The major challenge to that
view, however, is the ongoing rise in the cost of living, driven
by surging energy and food prices now being send east across the
Pacific from China.
The connexion is hardly strong enough to trade for
a living. You'd be hard put to explain how it works to your
friends and family as well. (Trust me, I've tried...)
But when Treasury bonds start paying less than
inflation – and real interest rates pay less than zero – the
stage is set, according to history, for a strong rise in the Gold
Market.
Just how crazy is that? Physical gold bullion pays
you nothing, remember. So it's always a losing investment
compared with bonds...right up until those fixed-income assets
start paying less than inflation. Then the destruction of wealth
by government debt leads investors, even if slowly at first, to
start doing crazy things.
What kind of crazy things?
Crazy Times, Crazy Reactions!
Crazy things like asking why-in-the-hell
they should lend money to the Treasury if the Treasury won't
even pay investors a real yield above inflation...
Crazy things such as dumping Treasury bonds quick,
pushing interest rates skywards and forcing Washington to offer
a decent rate of return – say two, three or even nine per cent
above inflation – in thanks for helping to fund war, welfare
and pork barrel pledges...
And crazier things still like Buying
Gold bullion...
Right now, of course, the only madness in the bond
market is the frenzy for below-zero yields. The seemingly crazy
reaction of selling instead – and pushing bond yields higher
– remains a long way off yet.
In the meantime, and for as long as the "smart
money" continues mistaking the destruction of wealth for a
safe-haven investment, that leaves the rest of us with an even
crazier choice.
Whether or not to Buy
Gold – a non-yielding asset that actually costs you to own
it – in the hope of defending your wealth against a loss of
real value in both Dollars and bonds.
Call it spite if you must. But if the world's No.1
currency – and the world's No.1 source of debt finance –
both fail to outstrip inflation, investors will slowly go mad.
Mad enough, in fact, to get even, swapping their Dollars for a
fistful of metal. Because gold, unlike the greenback, issues no
debt and offers to pay you no interest. It's simply been used to
store wealth, right across the planet, for more than 5,000
years.
Oh sure, gold was for the birds between 1980 and
1999. Real yields on 10-year US Treasury bonds, on the other
hand, averaged 4.35%. But since the start of 2000, gold has now
gained more than 160% (the current setback included). Ten-year
US Treasury bonds, in contrast, have paid barely 1.9%.
Last month real yields on the 10-year bond fell
below 1.0%, less than one-third what they were paying a year
ago. Is it mere coincidence that the Dollar's now toast?
Is it any surprise the Gold
Market just shot to a near record high?