Follow The Bottom Violation
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Jan
13
Gold is Safer Than Treasuries as Hedge Against Inflation
“Truth, like gold, is to be obtained not by its growth, but by washing away from it all that is not gold.”
– Leo Nikolaevich Tolstoy
Any time an asset increases in dollar terms, you have to ask yourself two questions:
1. Is the asset rising alone, relative to the rest of the economy?
2. Or is the asset rising in value along with everything else in the economy?
If, for instance, you had bought 1000 shares of Microsoft in 1988, you would have seen their values rise dramatically over the next decade, while most other asset values stayed relatively low across the economy as a whole. If, however, you had bought, say, shares of Coca-Cola in 1995, you would have seen the value of those shares rise only slightly over the next decade, relative to everything else.
On to my favorite subject. If you buy gold, and it gains value in dollar terms, what does that mean? If you buy an ounce of gold at $100, and it goes to $1000, what are the implications? Has everything else in the economy risen by 900% as well? In an environment where the money supply is expanding, and prices are rising, you need to make sure the assets you buy can outpace the currency collapse caused by inflation. I’m short treasuries right now, and my rate of return over the last year has been strong. But clearly prices in the economy haven’t risen at the same rate.
My prediction regarding Treasuries — and the reason I shorted them — resulted not from my belief that Treasuries are no longer perceived to be the safe store of value they once were. The U.S. has printed an unprecedented amount of currency, and as these dollars hit the economy, prices and interest rates are going to skyrocket. I believe that, while investors mistakenly believed Treasuries were a safe store of value — driving yields to historical lows — they have now realized the folly of that assessment, and they are beginning to run from Treasuries as fast as their little legs can carry them.
The last year has borne some of this out, but it hasn’t yet happened anywhere near the magnitude it eventually will. As I said, Treasuries are falling because of the return of risk-appetite — not because of a perceived loss-of-quality. And that’s why I believe shorting Treasuries was — and still is — a no-lose proposition: whether people eschew faith in them or not, yields are going higher, and if my prediction is correct, they’re going much higher — rather than returning to, say, the historical average.
So let’s say my prediction is correct. Let’s say the massive inflation the government is creating right now is going to drive prices and interest rates higher. Obviously, my Treasury short would benefit greatly, but what will gold do? And this is really what it all boils down to: for several years, gold and Treasuries moved nearly in tandem. They were both perceived to be of high quality. But despite the Fed’s best efforts, yields on Treasuries have climbed over the last year — even as they continued to be perceived as safe.
If I’m right — if the world is losing faith in Treasuries and the dollar — the first sign of it has been the decoupling of the price movements in gold and Treasuries. In other words, Treasuries continue to lose value as gold compounds its upward march, and that’s why I continue to think I’m right — that we’ve entered into a new economy. The world is beginning to shun the dollar and Treasuries as viable vehicles for the storage of value.
Nothing, in my opinion, is more important or germane to the future direction of the global economy than the relative price movements of Treasuries and gold right now. This is the place where I’m focusing all my attention, and it will be very interesting to see how it all plays out, because I think we’re on the threshold of a historic event — or, more appropriately, a series of events.
For the time being, bear in mind that falling prices right now are not a product of deflation — they are a product of deleveraging. Deflation, by definition, is a decrease in the amount of currency available, and the Fed is increasing, not decreasing the amount of available currency.
You folks have a great day. I’m going to go get a grill. Putting my money where my mouth is.
As it were.
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Disclosures: Paco is long TBT, UCO, and gold. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.
You can buy his novel Discipline wherever books are sold.
15 Comments so far
Partners
Thanks for your latest post. I agree that in the long run long-term interest rates can only go up, but, in your opinion, during the next market crash, do you think people will again 'retreat' back into to treasuries? I mean, do you think there will be a better buying opportunity for TBT in the event of a market crash? Would you advise people to buy TBT during times of greater risk aversion?
Thanks for writing again, Albatross…
I don't think they'll be able to retreat to Treasuries, because I believe foreign governments will be dumping them, wholesale, scooping up ag, energy, and metals, and driving interest rates through the roof. Nobody's going to want to own Treasuries. When you couple that with what I am certain is going to be massive currency collapse, you're really talking about a catastrophe.
I don't think anyone is going to have an appetite for U.S. debt. It's simply losing it's value as the so-called “risk-free rate of return.
Paco
Http://www.BottomViolation.com
Hey Paco!
Nice new site. How in the heck to we attach our avatars? I don't see it as an option in the log in.
Great Post.
It should be an option, Johnny… not sure why it's not working for you. Keep me posted!
Ahhh….I make it happen
Paco you should put in a new avatar pic with you in leather with a whip then bottom violation could have a new meaning. Are you tired of people commenting on this?
Be careful what you ask for!
Dunno…it might increase 'hits' on your site
*insert whip sound here*
Just don't buy paper-gold. Only buy metal-gold, I mean true gold, not just a paper receipt.
Go to the bank and just take it back to your home.
Lots of banks don't have metal-gold anymore.
In November 2009, Bank of England and Deutsche Bank couldn't deliver metal-gold to big clients.
Fed now delivers old coins. It seems as if metal-gold represent less than 1% of paper-gold.
When the paper-gold “anti-bubble” (don't know the name of the contrary of a bubble, a piece of paper that doesn't represent anything… dollar ?) will explode I think it will be a true panic.
Let's wait and see.
Just don't buy paper-gold. Only buy metal-gold, I mean true gold, not just a paper receipt.
Go to the bank and just take it back to your home.
Lots of banks don't have metal-gold anymore.
In November 2009, Bank of England and Deutsche Bank couldn't deliver metal-gold to big clients.
Fed now delivers old coins. It seems as if metal-gold represent less than 1% of paper-gold.
When the paper-gold “anti-bubble” (don't know the name of the contrary of a bubble, a piece of paper that doesn't represent anything… dollar ?) will explode I think it will be a true panic.
Let's wait and see.
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Gold is found in many places around the world. Known as one of the best ways to protect wealth from economic downturns gold is one of the safest investments out there and there are alo many scammers, whateer you do stay away fro monex
My recent post “Monex systematically underpaid their employees“
Nice post, gold will continue to outperform treasuries due to the weakened dollar, avoid spike in the dollar for sell offs
You can quantitatively value gold as an inflation hedge using actuarial methods such as insurance companies use to value premiums according to assessed risks. You can use the following online calculator to come up with a fair value of gold based on your own inflation expectations:
http://passantgardant.com/blog/61-gold-value-calc…
Likewise with silver:
http://passantgardant.com/blog/66-silver-value-ca…