|
"...Hardly anyone's noticed, but
the frenzy of safe-haven bond-buying has just pushed real yields on US
Treasuries below zero..."
IT'S BEEN A TOUGH WEEK for
anyone Buying Gold just below its all-time record high of
$850 per ounce last Friday.
By lunchtime this Thursday (Eastern
Standard Time), the Gold Price had dropped
almost 8% from its 27-year high of $849 per ounce - and in only seven days.
Even long-time gold investors,
not least those of us who climbed aboard below $300
per ounce back in 2001-2002, can't help but wish they'd taken a little money
off the table.
 
After all, a profit's not a profit until
it's in your pocket. Not unless you're an investment banker holding subprime mortgage bonds in
your "Level 3" accounts, that is.
But there's no profit even "marked
to model" for last week's gold buyers yet. So should they quit now while
they're only out by $60 per ounce?
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 came to stand one-fifth short of break-even once again. And it
took until Sept. this year to regain last May's level of $725 per ounce.
Can you now afford to sit on a loss in
gold - earning zero in yield and paying for storage - until Feb. 2009...? We
don't pretend we can see the future here at BullionVault. Blackjack
and bridge are more fun than tarot, to our mind. But in lieu of tea-leaves
and a crystal ball, we do like to study the past.
And if you won't study history when
you're investing your money, just what do you plan to study instead?
To put that question another way, what
else might new gold investors have bought last week that would have made them a quick
profit instead?
The "smart money" of
professional and institutional fund investors is surely shouting an answer. "Buy
Treasury bonds," cries Wall Street and London, "most especially short-dated
Treasuries!
"Quick, buy! Buy! BUY! before the Bernanke Fed takes
its scissors to US interest rates again and tries to prop up the mortgage
market with a fresh dose of cheap money!"
But if it's cheap money you want, then
the US Dollar is already cheaper than it's ever been before in history. And
glancing at what happened before once more today, we wonder whether
Treasury-bond buyers might not want to take a longer-term view, too...
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 latest reading
for 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 today.
Two-year yields have dropped by more
than 0.5% over the last month. They're dropped by nearly 1.5% since November
last year. CPI inflation, on the other hand, has risen from 2.0% in January
to above 3.5% last month.
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 the world and his
broker are right too, given his academic obsession with stopping the Great
Depression seven decades after it happened.
Just maybe Bernanke's
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 the
surge in energy and food prices that's now being send east across the Pacific
from China.
And given the slump in bond yields vs.
this rise in official US
inflation rates, what might it mean for Gold Prices?
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 at dinner tonight, either. (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.
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.
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.
Then comes the even crazier response of
selling Treasury bonds in a panic, pushing interest rates wildly higher and
forcing Washington to offer a decent yield - say two, three or even nine per
cent above inflation - in return for funding war, welfare and the rest of the
government's spending programs.
Clearly, however, those crazy reactions
in the bond market remain a long way off yet.
So for as long as the "smart
money" continues to mistake a loss 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 - to defend our wealth against the loss of real value in
both the Dollar 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 buy a mere lump of metal, used as a store of value for more than
5,000 years, that still pays precisely zero.
Gold was for the birds only between 1980
and 1999. Real yields on 10-year US Treasury bonds, on the other hand,
averaged 4.35%. Since the start of 2000, in contrast, gold has now gained more
than 160%...the current setback notwithstanding.
Ten-year US Treasury bonds, on the other
hand, have paid barely 1.9%. Last month real yields fell below 1.0%, less
than one-third what they were paying a year ago.
Is it any coincidence that the Dollar's
now toast? Is it any surprise that gold just shot to a near all-time record
high?
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
Current gold price, no delay | FAQ | Detailed outlook for 2007
Please
Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
| 
