Bonds v Gold

Yesterday we outlined a few important things happening in markets right now, one of which is sovereign bonds around the world seeing record or near record low yields as demand soars for these traditional safe haven ‘assets’ (for those new to bonds, see our article here that explains very simply).  Many were calling for bonds to fall (and inversely related yields rising) last year because the economy was supposedly improving and QE (where the US Fed bought them to print more money) ended.  The reality was indeed the opposite and the most prominent analyst (Steven Major of HSBC) that picked it right says it will continue into 2015.  Here’s a bit more of what Bloomberg reported on this:

“So far, 2015 is already shaping up to be a historic year. Yields on 10-year [US] Treasuries tumbled more than at the start of any year since 1998, ending at 1.95 percent last week. Benchmark rates in the U.S., Germany and Japan fell below 1 percent on average for the first time as deflation emerged in Europe, oil sank below $50 and American wages fell.

Major says borrowing costs can stay low for years because debt loads incurred by the largest economies after the financial crisis will drag on growth and constrain their ability to spend.

The global bond market has ballooned more than 40 percent to $100 trillion as governments bailed out the banking industry and plunging tax receipts deepened deficits.

Public debt reached 108 percent of gross domestic product in 2012, a level not seen since World War II ended, according to the International Monetary Fund. Even after some nations adopted austerity measures to restore fiscal discipline, the ratio will be 106 percent this year.”

What does this mean for gold and silver?  Well they are the ‘other’ safe haven in which to put your wealth.  The difference is they have been so for thousands of years and are not exposed to default should any of these debt burdened strung out countries default, or weaken further to the point that there is a ‘run’ on bonds/treasuries and the house of cards collapses.  Indeed on this scenario gold and silver will skyrocket.  Importantly too, bonds are at historic high prices whilst gold and silver, for now, remain at relatively low prices.  Finally whilst bond yields are low, so are interest rates which means the lack of yield on gold and silver becomes almost irrelevant, especially against the capital gain potential of buying low and selling high.

Whilst on bonds, the former head of the world’s largest bond dealer had this to say recently..

"When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over."

Bill Gross  Founder & former CEO, PIMCO