The Fear Bubble: Treasuries and Gold

These days, the only thing I know for sure is that fear is as overbought as ever. This is starting to get ridiculous: 30-year treasuries below 3%; gold up for the year; and risk averse investors paying Uncle Sam for the right to carry his wallet. Before I try to explain my position, let's just say I have a healthy dose of skepticism by all things spewed by insiders, lawmakers, central bankers, and media types.

The two ongoing fear trades are treasuries and gold, and both have had a very good 2008. It's not rocket science to say they should have a very difficult 2009. At some point, people will tire of being afraid. And when......and I mean 'when'...this trade reverses, the pain will be very bad. I understand the central bankers have entered a new paradigm of 0% fed funds, but what are real rates? And real rates are possibly scary high; in fact...maybe...contracting monumentally. What is the Federal Reserve running from? With the proverbial kitchen sink action today, is the Fed fighting a full scale deflation war? Gold looks very vulnerable and deflation is a huge risk to this metal.

Platinum, silver, and copper have all seen the light that is deflation, but gold continues to whistle by the graveyard. Now, treasuries could be the most vulnerable, and I would stay very clear except for a very short hedge. But gold........I can't see where treasuries and gold co-exist as best in show. Somebody owns a worthless ticket, maybe two worthless tickets. All commodities are down 30-60% for the year except for gold. Oh yea....it's a conspiracy. If you believe in 'the small investor is always wrong' then try and buy some gold on your street corner. In fact, I hear gold prospecting is making a new comeback.

I understand the re-inflation trade. Worldwide central banker intervention, government stimulus packages, bailouts upon bailouts, but gold investors have already been paid. That trade is over, we are in recession or depression, and asset values fall unless you own gold. The top in gold is being delivered by the marginal buyer - the fear buyer. And the fear bubble is about to pop! It's time to be long risk and short safety. Gold bugs should know that when the world sees it their way, it must be the wrong way. I'm looking to short gold, but waiting for a technical breakdown. Gold as part of a diversified portfolio is good, but I would prefer SLV over GLD.

Looking to short GLD or buy puts on GLD

Disclosure: Author holds a long position in UYG, no position in SLV or GLD.

Comments

[fatcat:]

Gold looks a little toppy right along here,but like you,I'm not ready to get short....got whip-sawed last time I tried it...

2008 Dec 17 06:38 AM

[Balderdash:]

gold is money. treasuries are crap debt.

treasury can't make gold.

would you keep a turd in your jewelery box?

2008 Dec 17 06:50 AM

[jo0hn2:]

oh you want to short it ha! short it now come on put your money where your mouth is. oh your waiting for the right time then sure how about a year from now man you are going to be one old shark. hey when you short gold ill short it to things that go up will eventually go down i will admit that but when this starts i dont see it going far.(though before people jump on me i will say that only when we reach the very top somewhere in the thousands of dollars years from now)

God i wish this was poker i wish you had all your money on the table i would raise you all in and dare you to call it with your faulty logic fact is when it comes to your highlly flawed argument of this being a temporary fear trade that has just miraculously shot up and been all sunshine and roses then your wrong. gold bugs have gone through hell latley and have always have. know what if you actually play poker i will love to play you and take your money. This is not fear fear was ohh early this year! what are you seriously ignoring the 300 dollar and plus drop even when things got worse? you cant be serious are you blind deaf and ******? it was only latley that things got better and it has nothing to do with fear hell i follow and trade this every day and i know what each and every movement is about a few fridays ago we had a sudden buying to push this from mid 700 to 800 for little reason. hell there are more true concpiracies keeping this down and having a hell of a hard time then there are with things bringing this up and were still fighting through it.

i would love for you to tell me how when the fed sais they will give out their money for free and also say that it is a blank check from here on out that serious inflation is FEAR buying. seriously have fun shorting man do it sometime soon i want you to lose bad.

2008 Dec 17 07:16 AM

[BSartiste:]

Small investors determine the trade direction of just about nothing. Treasuries are overwhelmingly held by foreign governments, and the largest gold traders are banks.

So what's your point?

2008 Dec 17 07:20 AM

[wdhalgren:]

"Gold looks very vulnerable and deflation is a huge risk to this metal."

I'd prefer not to sound insulting, but there's no gentle way to say this. You don't understand what you're writing about. Gold is money. Has been for thousands of years and the advent of green dyed cotton bills has not changed that.

The supply of gold is severely constrained; the supply of green ink and cotton are not. Now the US government has made clear, beyond any doubt, that there is no "full faith and credit" behind our currency. There is simply the following; We will print as many dollars for as long as it takes to relieve the debt burden facing America.

As for your deflation scenario, Bernanke has been completely transparent that he will not permit an increase in the value of the dollar. But, even if he did, the result would be a default on the debts of every state in the union and of the federal government. The debt load is too great. Do you really think that US government default would improve the value of a dollar relative to gold?

So, we will err on the side of inflation. You may believe that when the economy recovers a bit, just as folks are starting to feel good again, our central bankers will quickly mop up those excess dollars and faith will be restored in our currency. Gold will revert to jewelry status and dollars will reign supreme again. A perfunctory study of history, past and recent, should give you pause, but apparently you believe that a new breed of humans are now calling the shots.

So go ahead, pick a spot and short gold. Make it a central part of your portfolio strategy. If you're right, one of these days it could be almost as worthless as....a little piece of paper.

2008 Dec 17 07:22 AM

[abetterplace:]

You must have done very poorly in your history and economic classes.

2008 Dec 17 07:36 AM

[DiggerUK:]

I don't refer to myself as a Gold Bug. Nothing against them, it's just that none of my best friends are Gold Bugs.
I do accept the old addage that says "money isn't allways gold, but gold is allways money"
I do accept that fear moves the mob to buy gold, but not the market place.
So why is the market in gold holding up? It seems to be down to vanishing profits as they are used to deleverage the debts that are being called in. My holdings are for no other reason than to protect my retirement pot, not to speculate.
Talk of inflation/deflation are not of any worth to me,you may as well read tealeaves.
Gold is the only financial instument not affected in the current marketplace. Despite it's peaks and troughs over the last 15 years, it is trending up. Unlike all other instruments.
I'll end with some food for thought. At the March price spike gold in the UK was 500 GBP, todays a.m. fix was 550GBP. In March the exchange rate was about the $2.00 mark , and today it's about $1.50.

2008 Dec 17 08:13 AM

[TenneBob:]

Do yourself a favor and do a lot more reading before taking that short position in gold. Sure, you may get some volatility up and down in the short-term, but by 2011 it will be those of us who are long right now who should be more than pleased.

If you've got a short-term, trader mentality... play the short game. If you want to avoid the stress and getting your head handed to you, buy gold and don't even watch the screens for a year or more.

Deflation is going to be with us for a while in the near future, but in the end inflation is going to scorch us all... the dollar is toast, thanks to $8.5-Trillion in Fed intervention--and rising fast.

2008 Dec 17 09:20 AM

[TenneBob:]

Oh my goodness, now I see you're long on financials.

I tell you what, promise me you'll stay long in that till January 2011 and I'll stay long gold till the same time and we'll see who comes out ahead.

(No, don't do it. Really. I wouldn't want to see anyone take that hit.)

Once the Alt-A loans start hitting the wall in 2009 and 2010 it will make sub-prime look like nothing.

2008 Dec 17 09:24 AM

[applesauce:]

If Saudia Arabia and China buying tons of gold are marginal small buyers you have a point, fact is they do not want to get caught with worthless dollors when the music stops and sees that king Bernacke has no clothes

2008 Dec 17 09:50 AM

[Smarty_Pants:]

"I understand the central bankers have entered a new paradigm of 0% fed funds, but what are real rates?"

Real rates are negative. Even buyers of US long bonds are losing money in real terms. Check historical context: gold usually does very well when real rates are negative. Even fixed income guys eventually figure out that holding gold at no return is better than holding debt that's losing purchasing power.

Go ahead and short gold, I'm sure you'll find many here willing to take the other side of that trade.

2008 Dec 17 10:50 AM

[bricki:]

Haha you think delevering 54 trillion dollars of debt is not going to soak up the piddling into the pond the Fed is doing?

We are into the biggest deflationary crash in world history. This is not the great depression replay here. It is much worse because the bank's leverage is much higher.

Hint: what happens when something goes scarce? The price goes up.

2008 Dec 17 11:01 AM

[Alex Stanczyk:]

I laughed.

2008 Dec 17 11:28 AM

[sieraromero:]

Why is nobody asking why the FED is taking this action and doing it now? They see something coming this way and I am willing to bet that whatever it is, it is not going to be pleasant! In my opinion, the market is way overvalued here as I have kept on saying for the last year. People are way overly optimistic and think that life as we know it is going to continue. We have not as yet, seen any meaningfull decline in the markets that reflect the true future value of the corresponding securities and the markets are supposed to be efficient and forward looking.What a joke! The whole system is broke, dishonest and ineffecient and isn't going to be able to be fixed anytime soon!

2008 Dec 17 11:48 AM

[User 267182:]

There may be a fear bubble at the moment but that doesn't mean it can't get worse. Early next year we should be seeing all the Alt-A and Jumbo Prime's getting repo'd. Industrial activity will plummet (yet again) and we should see another plunge in the markets. More fear to come, I fear.

2008 Dec 17 11:55 AM

[Tony Daltorio:]

Wow! The author is long financials. That tells me enough about him.

2008 Dec 17 12:50 PM

[Gardener:]

Jo0hn2,

Why the attitude? Seeking Alpha used to be a place for intelligent, respectful debate among professionals. There are a lot of amateurs making this site up pleasant.


On Dec 17 07:16 AM jo0hn2 wrote:

> oh you want to short it ha! short it now come on put your money where
> your mouth is. oh your waiting for the right time then sure how about
> a year from now man you are going to be one old shark. hey when you
> short gold ill short it to things that go up will eventually go down
> i will admit that but when this starts i dont see it going far.(though
> before people jump on me i will say that only when we reach the very
> top somewhere in the thousands of dollars years from now)
>
> God i wish this was poker i wish you had all your money on the table
> i would raise you all in and dare you to call it with your faulty
> logic fact is when it comes to your highlly flawed argument of this
> being a temporary fear trade that has just miraculously shot up and
> been all sunshine and roses then your wrong. gold bugs have gone
> through hell latley and have always have. know what if you actually
> play poker i will love to play you and take your money. This is not
> fear fear was ohh early this year! what are you seriously ignoring
> the 300 dollar and plus drop even when things got worse? you cant
> be serious are you blind deaf and ******? it was only latley that
> things got better and it has nothing to do with fear hell i follow
> and trade this every day and i know what each and every movement
> is about a few fridays ago we had a sudden buying to push this from
> mid 700 to 800 for little reason. hell there are more true concpiracies
> keeping this down and having a hell of a hard time then there are
> with things bringing this up and were still fighting through it.
>
>
> i would love for you to tell me how when the fed sais they will give
> out their money for free and also say that it is a blank check from
> here on out that serious inflation is FEAR buying. seriously have
> fun shorting man do it sometime soon i want you to lose bad.

2008 Dec 17 12:56 PM

[mdtrader:]

Gold is one of the few assets classes in a long term bull market. It's amazing that there is so much bearish commentary. Gold was trading around $250 at the start of the century, and here we are at $870. Can you imagine everybody being bearish of the Dow if it had just risen 250% in the last 8 years?

Bernanke spelled it out for people yesterday, for those who did not pay attention to his 2002 speech. There will be no deflation, not while the FED still has printing presses anyway. The penalty for the reflation will be the dollar. See you at $1200 per oz.

MD

2008 Dec 17 02:17 PM

[OldLimey:]

Buying gold and being fearful are not necessarily the same. I own some physical gold because I don't believe the deflation spin and I do think inflation is likely, but I'm far too ignorant to be fearful. I simply have no idea what's going to happen. (By the way, I lived in the Middle East and Asia for over two decades and I can guarantee the author that some of the folks I know there who are moving out of USD and into gold are not bit players. That doesn't mean their timing is right, of course, but marginal actors they most certainly are not.)

2008 Dec 17 02:21 PM

[livesinhiscar:]

Geez, reading these comments, why do gold bugs take a contrary opinion so personally?

2008 Dec 17 02:59 PM

[deuxsous:]

Deflation and devaluation are coming, therefore Treasury Bonds and
Gold.

2008 Dec 17 03:46 PM

[Socialism c...:]

As we all know...there are two sides to every trade!! They just usually remain nameless and faceless to us. ;)

2008 Dec 17 04:46 PM

[DiggerUK:]

I don't believe that the gold trades of bugs, citizens,the panicked mob, and those like myself who own less than 120 oz's affects the spot price by a penny. It is the trading of major institutions that have a greater effect.
Most postings take a very blinkered and "UScentric" view of world finances.
Understandable when you consider the dominance of the US in world affairs for the best part of 60 years.
Now it is different. The biggest debtor nation on the planet is in danger of losing control of it's own currency. Not just any old fiat currency but the majority of the world's reserve currency.
It seems to me that the only reason the $US is holding out is because some central banks are still on 0+% interest rates. How are they not going to have to reduce to near 0% interest rates without collapsing their currencies if they hold out?
Then the chickens will have to come home to roost.
The chickens I refer to are the unknown ammount of $US in circulation that are the eqivalent of cheques not yet presented to the bank.
If "Bank USA" dishonours these cheques what then happens to confidence in "Bank USA"
Panic amongst the mob is one thing, but when the major institutions flip out what then?
Will they head for Treasuries, Real Estate, Bargain Shares, or real money(Au?).

2008 Dec 17 06:45 PM

[secmaven:]

What cataclysmic event is going to occur in 2009 that suddenly causes fear to change to hope so that the now no longer fearful gold owners will dump their gold at a 1980 price? And what was the fear that moved gold from 250 to 800? If I remember correctly during the time most of that rise occurred the economic skies held very few clouds and, aside from disgust with the Iraq war, the mood of the country was very upbeat.

2008 Dec 17 10:14 PM

[BrucePile:]

The notion of treasuries and gold fading in 2009 makes sense if fear fades. But how can we know fear goes away? In this market, we can't be certain of anything. There is an unprecedented global debt unwind upsetting all the usual guide posts we're used to. The fund company Bernstein reported results of a survey to Barron's (12/15) and moneymorning.com (11/25 ) saying that about 2/3 of fund managers give the deleveraging process only about a 50% completion rate. But they also report that about $40 billion was yanked in that October ordeal and that some $200 billion needs yet to be delevered. Egad! - that's four more Octobers possibly out there lurking.

2008 Dec 18 11:54 PM

[frigged:]

This is Deflation,and has been for quite some time,and we'll be in it for a long time yet--
Those who think Gold does well in Inflation are wrong--
Take a look at a Gold chart from 1980--1998--
Gold did nothing --Those were all years of Inflation--
Gold only does well in two scenarios --
Deflation and Hyper-Inflation---
Pull up a chart of Homestake Mining in the 30's for proof--
The posters above who pointed out--Gold is money,are correct--
What does best in Deflation??---MONEY

2008 Dec 19 02:22 AM

[CLH:]

Mark you are right but when you enter the church of the gold bugs all science goes out the window. You cant argue with religion.

2008 Dec 19 12:56 PM

[frigged:]

"Mark you are right but when you enter the church of the gold bugs all science goes out the window. "

I'd be real interested in your definition of "science"---
If you would care to debate "anything " Economic based,I'd be happy to comply--

2008 Dec 19 07:23 PM

[Alan von Al...:]

Remember when it was a patriotic duty to buy war bonds? Then Series E Savings Bonds? Now it's 10-year Treasurys dead certain to lose money. The church of gold, if you want to sling mud at liberty, doesn't have to give its name and home address to the government, doesn't have to stand in line at the post office or whichever FDIC-makebelieveinsure... bank is still standing next month. Around the world, central banks and private banks know that gold is money. We trade sovereign notes, claims on future tax revenue, because there's a legal embargo against gold-clause banking. But the long view of history suggests that paper money regimes come and go.

2008 Dec 19 07:31 PM

[What_the_heck?:]

You wrote "... we are in recession or depression, and asset values fall unless you own gold." Is that not, by your own words, a case for owing gold???

2008 Dec 29 07:27 PM

[Shannon Melton:]

Paco Ahlgren's latest blog about Treasuries and Gold:

experienceiseverything...

Jan 06 03:56 PM

[Shannon Melton:]

No. Deflation is NOT falling prices, deflation, by definition, is a contraction in the amount of currency available. Falling prices and interest rates are a RESULT of deflation, not deflation itself.

Prices and interest rates are falling right now in spite of INFLATION -- that is, the printing of more currency than ever in history. These falling prices are part of the deleveraging process, and when it's over, inflation is going to destroy the dollar. Bernanke may think he's smart, but he's not THAT smart.

Add to all of this the fact that the Chinese hold trillions of dollars in Treasuries, all it's going to take is a whiff of smoke, and they'll start selling.

Try to remember that we have always been a creditor nation in previous collapses.

Paco Ahlgren, Peter Schiff, and other Austrians have been predicting this for years. Everyone should listen to what they have to say. In fact, Ahlgren just wrote a series of articles dealing with this very issue. I've been posting them here for a few days. They make all this much clearer.



On Dec 17 11:01 AM bricki wrote:

> Haha you think delevering 54 trillion dollars of debt is not going
> to soak up the piddling into the pond the Fed is doing?
>
> We are into the biggest deflationary crash in world history. This
> is not the great depression replay here. It is much worse because
> the bank's leverage is much higher.
>
> Hint: what happens when something goes scarce? The price goes up.

Jan 06 04:41 PM