The Fate of Treasuries in the Upcoming Ka-Poomification

[jk]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

You need to get your gold now, accumulate before mass public participation.



Bonds are terrible in the type of inflationary times we are in. They are a guaranteed wealth destruction vehicle UNLESS there is the classic currency appreciation / classic deflation that happened in 1929-1932.

Rick Ackerman and Mish believe in this. I don't. I believe we are already experiencing real currency depreciation rates of 10% or so per year. The government misleads the public into scrutinizing the gamed and deceptive "CPI" or better yet "core CPI" numbers, which give the impression that the currency depreciation is very slow.

That will change soon. I agree with Steve Saville who has pointed out that the government's corn-to-ethanol mania is causing corn to crowd out other grains and is raising food prices, which will show up quite dramatically soon.

So if the currency depreciation is really 8% - 10%, how is your wealth being conserved? At 5% loss per year...

When will bonds be a good investment again? When real interest rates turn decidedly positive. When will that be ... ?

i agree. BUT i don't think a portfolio should be structured solely around what you think is the single most likely scenario. i think probabilities should be assigned to various scenarios and assets deployed on a probabilistic basis. so bonds may have a role even in the portfolio of an investor who thinks we [most likely] have an inflationary present and future. in fact, a small position in zero coupon treasuries might be a good hedge against the [unlikely but possible in my view] deflationary scenario. if, in fact, inflation takes off those zeroes will go to zero, but a larger pm position will more than compensate.

[grapejelly]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

i agree. BUT i don't think a portfolio should be structured solely around what you think is the single most likely scenario. i think probabilities should be assigned to various scenarios and assets deployed on a probabilistic basis. so bonds may have a role even in the portfolio of an investor who thinks we [most likely] have an inflationary present and future. in fact, a small position in zero coupon treasuries might be a good hedge against the [unlikely but possible in my view] deflationary scenario. if, in fact, inflation takes off those zeroes will go to zero, but a larger pm position will more than compensate.

this makes good sense.

I am reading yet another take on the so-called deflation of the 1930s, this time Rusell Napier's Anatomy of the Bear, a book that I heartily recommend.

The deflation took place from 1929-1932 in that wages and prices and asset values collapsed.

There is no question about this. It is a fact.

What is hotly debated, however, are the causes. And simple things like what the Fed was doing seems to be in debate.

But my point is this. The Fed was printing money like crazy through open market operations. They didn't want to do it but they did it anyway, because congress was getting into the act and the Fed was afraid direct political intervention would eliminate their role.

Despite this, there were two banking crises and despite severe sharp rallies a drop of about 89% in stock prices, among other things.

The result of all this money printing was that the Europeans started disinvesting from the US. Taking their gold with them. And we all know what happened as a result of that.

So even here, in this deflationary spiral, we had depreciation of the US$ in comparison to gold.

You are certainly right in that we should view investing without attachment to a particular outcome. We should take a quantum view -- there is a collection of outcomes, each with a probability associated to it and we can't know which one will come to pass.

The zeros idea is interesting!

[BK]

Re: Problems with TIP and I-Bonds

I've used I-Bonds and still have some. I'm guilty of believing this would protect our cash from

1. The CPI Whipsaw - the CPI value changes every six months. If the CPI-U (inflation spikes for one period) it is followed by a really low number for the next six months. So, you'll feel good about your investment ever other Six month period. Yes - your Dollars APPEAR to be preserved, but are they really - I think not.

2. Lack of protection from Dollar slide. There are two or three Mutual Funds that will give you exposure to Treasuries from Multiple countries. This could give you better protection from inflationthan just US Treasuries - especially if you fear deflation.

3. TIPS are better than a CD - but, provide very little true inflation protection. The alternative is a Mutual fund that holds multiple currencies and some Gold (this may take the fear out of Owning Gold).

Good Luck

[raja]

Re: Problems with TIP and I-Bonds

An interesting and detailed discussion of I-Bonds vs. TIPS here: http://www.fatwallet.com/forums/messageview.php?query=i-bonds&catid=52&threadid=635928

According to this, TIPS seem to be better in some respects . . . .

[raja]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

According to the World Gold Council -- "In the last 6,000 years a little over 125,000 tonnes of gold has been mined."
One ton is 32,000 ounces, so that's 4 billion ounces of above-ground gold in the world.

Wikipedia states, "The size of the worldwide 'bond market' is estimated at $45 trillion. The size of the 'stock market' is estimated as about half that. The world derivatives market has been estimated at about $300 trillion."
That totals about $367.5 trillion of investment money in these three markets, and does not include CDs and many other forms of investments.

What happens if a financial meltdown begins, and some of that investment money is rapidly put into gold?

According to my calculations, if 1/4 of this investment money (about 92 trillion) was evenly allocated into all the existing world's gold, it would come to $23,000 per ounce.

Now $23,000 per ounce is a hefty amount, but it could be a lot higher.
I guess that a fair portion of the world's gold is not for sale, because it is in use in jewelry, electronics, or is otherwise unavailable.
So, to make things a little more dramatic, lets say 1/2 of that investment money was chasing 1/2 of all the world's gold. Gold-to-investment-dollar would then be $92,000 per ounce.

How high can the price of gold go before it's recognized as a bubble and begins to collapse?
$5,000 an ounce? $10,000 an ounce? $23,000 an ounce? $92,000 an ounce.

At some point during gold's upswing -- I think surprisingly quickly -- it will be generally understood that gold cannot serve as an effective safe haven for wealth, because there is just not enough gold to go around before the price becomes unnacceptably high.
With the instant transmission of global financial news and computerized electronic investing, the upcoming gold bubble (should one happen) could rise and fall extremely rapidly.

With the benefit of the above facts, let me expand on the scenario I started earlier in this thread . . . .

Suppose someone is sitting on a pile of gold coins. The price of gold has rapidly risen to astronomical hieghts, but now is beginning to head down. The bubble is popping, and it's popping fast.
The gold-coin owner calls up their gold dealer, but the phone is continuously busy. Another is tried, but no luck. It appears that in the bubble hysteria everybody is buying and selling gold, and the systems for selling physical gold are too overloaded to handle all the traffic.
Within two days the price of gold plummets, and the gold-coin owner's hopes of cashing in have been decimated along with the bubble.

But wait . . . this gold investor had also put a portion of his portfolio in TIPS. As inflation shot up, TIPS kept pace, albeit at 90% because of dastardly government CPI manipulations. Even so, this investor was much better off than most who had their money heavily weighted in stocks, corporate bonds . . . or gold.

I'd really like to be wrong about this scenario . . . but I've not seen much in the way of facts to convince me this would not happen. I'd like to get some more feedback on this from those with a contrary opinion.

Speaking of fears, here's another one . . . .
Just like the Asian crisis in the 90s, is it possible that a financial downturn in the US could spread from country to country, leading to a deep, worldwide slowdown and recession? What non-dollar denominated assets would be safe in that scenario? Currencies, for example, which only have value relative to other currencies?

[Tocqueville]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

For the folks on this thread advocating buying physical gold and nothing else, there are plenty of proplems with gold that other forms of investment do not have and gold does have the same problem that other investments have: it does go down dramatically sometimes.

One problem with owning physical gold is where to put it. If anyone knows you have it, you could be robbed. And some people will know you have it. The place you bought it from, the shipper, the deliverer. And if you store it in a safe deposit box, is that better than paper ownership?

Another problem is selling physical gold. You will have to pay to have it verified/assayed, right? Pay to have it shipped, insured to whomever buys it. Transaction costs are higher than stocks/bonds.

So you folks that are advocating just buy gold, how much gold do you have in your stash? You aren't really 100% in gold are you? If so, how do you solve the above problems with it?

[grapejelly]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

Just remember that gold coins and silver coins have served as stores of wealth for far longer than TIPS or bonds or fiat. There must be a reason for this.

One reason is that supply of new gold isn't very large, while supply of new fiat is unlimited in theory.

And there are not fiat currencies that have lasted all that long. We're talking decades, in many cases a few years, while gold and silver have thousands of years of history as a store of value and medium of exchange.

The US$ has served as a very poor store of value and all indications are that it will continue to be poor.

[EJ]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

Just remember that gold coins and silver coins have served as stores of wealth for far longer than TIPS or bonds or fiat. There must be a reason for this.

One reason is that supply of new gold isn't very large, while supply of new fiat is unlimited in theory.

And there are not fiat currencies that have lasted all that long. We're talking decades, in many cases a few years, while gold and silver have thousands of years of history as a store of value and medium of exchange.

The US$ has served as a very poor store of value and all indications are that it will continue to be poor.

Interesting thread. My response to this topic, here.

[raja]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

Interesting thread. My response to this topic, here.

The link appears to be subscription only . . . .

[raja]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

Granted, gold has a long history of serving as a storehouse of wealth.
But can it still serve in that capacity in modern times . . . and to what extent?

From "America's Bubble Economy":

"Gold . . . remained the metal money of choice as societies continued to evolve. After the movable-type printing press in 1440 and the steam engine in 1769 ignited an explosion of trade around the world, more and more gold was needed to keep up with trade . . . . there just wasn't enough gold available to keep up with so many transactions . . . trade was simply growing too fast to dig up enough gold to keep pace with our rapidly expanding economy."

As a result of gold's shortcomings, fiat currencies, bonds and TIPS evolved.

There just isn't enough gold to accomodate even a tiny fraction of today's wealth . . . unless prices go to astronomical levels.
This situation may result in a very, very brief bubble, which will quickly collapse as soon as people realize that gold doesn't work anymore.
And, when they realize it doesn't work anymore, my fear is that gold may plummet to commodity price levels . . . . .

[grapejelly]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

There just isn't enough gold to accomodate even a tiny fraction of today's wealth . . . unless prices go to astronomical levels.
This situation may result in a very, very brief bubble, which will quickly collapse as soon as people realize that gold doesn't work anymore.
And, when they realize it doesn't work anymore, my fear is that gold may plummet to commodity price levels . . . . .

There just isn't enough gold to accomodate even a tiny fraction of today's wealth . . . unless prices go to astronomical levels.
This situation may result in a very, very brief bubble, which will quickly collapse as soon as people realize that gold doesn't work anymore.
And, when they realize it doesn't work anymore, my fear is that gold may plummet to commodity price levels . . . . .

Well, who knows. But the argument that there isn't enough to go around sounds nonsensical to me. Eventually gold may top out in a blowoff parabolic bubble and then collapse. Like the Nasdaq 2000 or Gold in 1980 or lots of other manias. How is that an argument today, when you can't find average people who care a whit about gold? We have years to go before that blowoff top happens, which will require widespread public participation.

Take a look at http://www.sharelynx.com/chartstemp/DowGoldRatio.php

[raja]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

Well, who knows.

On that we agree

But the argument that there isn't enough to go around sounds nonsensical to me.

Why?

Eventually gold may top out in a blowoff parabolic bubble and then collapse. Like the Nasdaq 2000 or Gold in 1980 or lots of other manias. How is that an argument today, when you can't find average people who care a whit about gold? We have years to go before that blowoff top happens, which will require widespread public participation.

It's true that the average person doesn't consider gold as an investment now. But if the world stock markets suddenly dropped to half their value due to a derivitive collapse, you can bet that everybody who has savings will be thinking about gold. Gold will soar and it will be reported on the national news. Then, my fear is that the scenario I've laid out in my previous posts will come to pass.
But, as you said, who knows?
Still . . . until I see something that contradicts my scenario, I'm hedging heavily with TIPS. Also, I seem to be slowly talking myself out of gold, which I had been thinking was a great investment. I would really like to hear some facts that would debunk my scenario . . . .

Take a look at http://www.sharelynx.com/chartstemp/DowGoldRatio.php

This chart shows how much gold is required to buy the DJ Index. But Dow Jones stocks are a fraction of the US stock market, which itself is only a part of all the worlds stocks market. Furthermore, as a class, stocks are only 6% of the global stock, bond and derivitve universe.

[friendly_jacek]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

But if the world stock markets suddenly dropped to half their value due to a derivitive collapse, you can bet that everybody who has savings will be thinking about gold. Gold will soar and it will be reported on the national news. Then, my fear is that the scenario I've laid out in my previous posts will come to pass.

I think that you did figure it out for yourself. If so, what stops you from entering gold now and exiting when "Gold will soar"? There will be plenty of time as bubbles tend to persist for some time. Study the gold charts from late 70's and early 80's.

[bart]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

But the argument that there isn't enough to go around sounds nonsensical to me.

Why?

Fill in any other quantity limited item and ask yourself the question.

Still . . . until I see something that contradicts my scenario, I'm hedging heavily with TIPS. Also, I seem to be slowly talking myself out of gold, which I had been thinking was a great investment. I would really like to hear some facts that would debunk my scenario . . . .

This chart shows how much gold is required to buy the DJ Index. But Dow Jones stocks are a fraction of the US stock market, which itself is only a part of all the worlds stocks market. Furthermore, as a class, stocks are only 6% of the global stock, bond and derivitve universe.

Go right ahead and talk yourself into or out of whatever... but do your homework and make sure your facts are complete and have as little spin as possible.

Your view on the Dow being a fraction of US stocks is of course correct... and now ask yourself how representative it is on a longer term basis of all US stocks.


And then take this chart into account, which backs up many of the points made in Faber's book "Tomorrow's Gold" and Jim Roger's book "Hot Commodities" (thanks grapejelly, that's what happens when I'm a quart low on coffee on Monday):

[raja]

Re: The Fate of Treasuries in the Upcoming Ka-Poomification

what stops you from entering gold now and exiting when "Gold will soar"?

I explained that with a possible scenario in my previous post in this thread. . . .

There will be plenty of time as bubbles tend to persist for some time. Study the gold charts from late 70's and early 80's.

Regards the persistence of bubbles, you may be right. But I believe it's also possible that the speed of modern global communications and computerized trading will greatly accelerate any similar scenario that occurred in the 70s or 80s, making a future gold bubble very short-lived and hard to call . . . .