As Bond Prices Sink, Hold on to Gold

January 25, 2009

Is 2009 the year gold finally comes into its own as a safe haven asset? Certainly everything is pointing the way of precious metals, and now it looks as if the bond market is failing as a competitor safe haven.

Falling bond prices

The last shoe to drop in financial markets is the biggest of the lot. Bond markets are huge and critically impact on currencies, government borrowing and by implication precious metal prices.

At the fundamental level it is very easy to see why a Saudi investor or Gulf State might today buy gold or silver above US treasury bonds. The tiny yield on treasuries assumes zero inflation at a time when government spending is soaring and all history suggest that this will mean inflation.

If nothing else this has undermined the argument that gold does not pay interest. Moreover, investors can see that governments can inflate the supply of bonds - but not the supply of gold and silver.

Perhaps that is why the price of gold and its cheaper cousin, silver, is up since the start of the year. There are some big physical buyers out there, and the price is responding to increased demand and almost fixed supply.

That could be a disappointment to the goldbug conspiracy theorists who have spent the past decade coming up with ever more elaborate arguments about who is fixing what, where and when.

This is like President Obama complaining that China manipulates the yuan, just as if the US does not manipulate the dollar - this is what central banks do, for better or worse. Yes they might pull gold down for a few hours on Monday but this is short term and less and less effective.

Systemic failure

The problem now is that we face systemic financial failure. The central banks have made massive policy errors and more and more investors are beginning to realize the obvious truth: they do not know what they are doing, and will have no more success in solving these problems than they did in avoiding them in the first place.

It is always my beef with conspiracy theorists that the foul-up theory of history - with random actions by idiots - holds up much better to analysis.

But when financial systems come crashing down it is gold and silver - the only true money - that you want to be holding. Bonds, shares and real estate are going down in 2009 - and don’t forget that bonds will ultimately take the US dollar down too.

Holders of a diversified portfolio of precious metal assets will make a fortune as this narrow market becomes the object of incredible demand. It is a historic opportunity for those who move quickly. Save yourself, why go down with the crowd!

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