King of Bonds: “Don’t Buy Bonds, Buy Gold”

Posted | 10/08/2016 / Views | 3591
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Overnight we saw evidence of the gold and silver drop that followed last Friday’s payroll data unwinding. This is entirely consistent with the larger trend suggested by the chorus of recommendations coming from investment legends. The reality is that governments are abusing the privilege of issuing trusted debt on a scale that is incomprehensible to many followers of classical economic teachings and the warnings are becoming hard to ignore. PIMCO founder Bill Gross has recently stated “I don’t like bonds; I don’t like most stocks; I don’t like private equity. Real assets such as land, gold and tangible plant and equipment at a discount are favoured asset categories”. 

What’s not to like about bonds? One simple answer is that the risk reward ratio is now unacceptably high, particularly in cases where the reward is guaranteed to be negative. Gross explains: “Sovereign bond yields at record lows aren’t worth the risk and are therefore not top of my shopping list right now; it’s too risky”. Furthermore, “low yields mean bonds are especially vulnerable because a small increase can bring a large decline in price.”

Share market participants will have noticed the inexplicable upward stock price trajectory in recent weeks and all in the context of horrible economic data and low volume. Those who took the opportunity to short what should have been a short-lived rally have been left bloodied in the process. Again, Bill Gross explains “The credit-fuelled economy is running out of steam, and central banks can continue with their easing but doing so will distort the markets. These two realities will eventually lead to disaster and terrible returns for investors unless there is serious GDP growth pickup.”

The key take away is that gold’s value is not linked to a government or central bank; something to ponder if any of the above sounds unsettling.


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