Gold Even More Attractive as Cash Yields Approach 0% 14 comments
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I've had my fair share of philosophical arguments in regards to gold and economics. Most of the time I feel like I'm shadow boxing because I'm usually introducing elements to my opponents that they've never been exposed to. And when I expose them to the pragmatism of gold, they are usually flustered and respond back with the logic that has been spoon fed to them by the powers that be. Most of the time, I may as well be talking to a wall because people don't seem to respond well to painful realities. Oh how easy it is to fool the lemmings!
It utterly bewilders me how educated folks have such a hard time understanding basic economics. It's really not that hard to understand.
One of the most common assaults against gold is the idea that it doesn't pay any interest. Well, duh. It doesn't pay any interest because there is no risk involved in holding it. Usually you are paid interest because there is a certain amount of implied risk to holding a certain asset, and this is measured by the yield. Gold has no risk because there is no obligation attached to it. Once it's in your possession it's yours. That's it. End of story.
When you hold bonds and Treasury instruments, they pay interest because there is a possibility that you just may never get your money back (no matter how slight that may be). And guess what, there is also an inflation element. Inflation eats away at your purchasing power. In a credit based fiat-monetary system, as we have right now, there is nothing keeping the supply of funny money from growing, so inflation is built into the system and hyperinflation is just around the corner.
And hey, isn't that nice. Now that I think about it, there is an inflation element built into gold! When inflation rages, gold holds its value. The average person will see this as an increase in the "price" of gold, but in reality gold is not moving up or down, the money in your pocket is just getting more and more worthless! Curiously enough, in deflationary environments gold does just as well. During deflation, the demand for liquid 'money' increases, as we are witnessing right now. Gold has held up remarkably well during this time of massive de-leveraging. If you compare gold in relation to the currencies of the world you'll see that it's done phenomenally well. I encourage you to view this Adam Hamilton article to see exactly what I mean.
Guess what folks, Treasuries don't pay enough to cover the inflation rate. And yet you still have all the risk of default, inflation risk and lost opportunity cost. This argument has got absolutely no more legs to stand on. The argument is worthless.
The most recent treasury yields are below. I got them from the Treauries website.
January 2009
Stock position: None.
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This article has 14 comments:
For one thing, long bond yields definitely cover inflation.
"Guess what folks" - I don't understand how this populistic and one-sided article qualified for publication at SA? T
The flight to the dollar of late is just a flight to liquidity. It's merely a choice of the 'best of the worst'. All fiat currencies are floating abstractions. The wealth will eventually flow to where it is treated best. This is not going to be treasury instruments.
As far as my comments being one sided. Yes I'm guilty. I have an agenda to promote gold. And guess what, my one sided comment probably cancels out an opposing one sided editorial on the SA site. And guess what? Opinion pieces are usually one-sided. I might add that your comment is pretty one-sided. You should add an addendum to your comment to balance it out. Sounds a bit negative. That way we can all be one step closer to utopia.
Bio will be up shortly. I just sent to the editor.
On Jan 13 08:44 AM hefaistos wrote:
> "Guess what folks, Treasuries don't pay enough to cover the inflation
> rate. And yet you still have all the risk of default, inflation risk
> and lost opportunity cost. This argument has got absolutely no more
> legs to stand on. The argument is worthless."
>
> For one thing, long bond yields definitely cover inflation.
>
> "Guess what folks" - I don't understand how this populistic and one-sided
> article qualified for publication at SA? T
As far as my comment being one-sided. Guilty as charged. It is an opinion piece. I'm sure there is another article floating around here on SA with the exact opposite argument so we should be fine. The universe will not tilt off it's axis because all commentary has now been cosmically balanced. Guess what? You're comment is pretty biased. You should balance out the negativity with a picture of a bunny.
Bio has been sent to editor.
On Jan 13 12:46 PM Gold-Speculator.com wrote:
> Hefaistos, I'm curious what you believe the inflation rate to be.
> I hope you're not quoting off government statistics. So let's say
> that the long bond does yield enough to cover inflation (which I
> don't believe it does And to believe that over 30 years a rate of
> 2.99% will suffice? C'mon....) then you're still only getting a 0%
> return instead of a negative return. This doesn't cover any of the
> default risk.
>
> As far as my comment being one-sided. Guilty as charged. It is an
> opinion piece. I'm sure there is another article floating around
> here on SA with the exact opposite argument so we should be fine.
> The universe will not tilt off it's axis because all commentary has
> now been cosmically balanced. Guess what? You're comment is pretty
> biased. You should balance out the negativity with a picture of a
> bunny.
>
> Bio has been sent to editor.
>
Hey, it's not very relevant to make examples about "raging inflation", when reality is that there is deflation. If you get 2-3% on a bond it clearly means you have a positive real yield. If there is deflation, bonds are an excellent investment.
From the government:
"On a seasonally adjusted basis, the CPI-U decreased 1.7 percent in November after declining 1.0 percent in October. The index for all items less food and energy was virtually unchanged (0.0 percent) in November after decreasing 0.1 percent in October."
I don't think you understand the concept of real yield. 2-3% yield on an instrument does not take into account inflation.
And I think we need to clear up the use of deflation and inflation if we are going to toss those words around. You are referring to deflation as price depreciation. What we had was a historic credit expansion and credit collapse. Assets were sold by over-leveraged institution to meet liquidity and margin requirements. This led to a wholesale panic out of most assets, which went into dollars for a few reasons (of many).
1. As I mentioned, it is the best of the worst (out of all the currencies)
2. It is one of only a few markets large enough to sustain such a large amount of surge buying. (Any other market would have gone into a moon-shot)
When I refer to inflation, I refer to it explicitly as a monetary phenomenon which always eventually translates into price inflation. If you take a look at the amount of money that has been created over the last few months, the only conclusion you can come to is that some of that money will eventually hit the streets (and some of a grossly humongous amount, equals a very large amount) and cause an upward spike in price inflation. The only reason you are not seeing it now is because the money is not being released from the balance sheets of the banks because they are refusing to lend. This is exactly what happened during the Great Depression. As it is the Feds mandate to get this credit freeze thawed and money flowing again, the massive money printing operations will eventually translate into hyper-inflation, which will result in the collapse of the dollar. At which point the dollar will either be replaced or propped up in some hybrid form. (several years from now?)
What about the risk of threat or cost of protecting it?
In your world, gold goes up during inflation and up during deflation. When does it go down, actually?
And if it just acts as a counterweight to inflation, where's the outperformance?
I actually like gold as an investment but I don't think you made any intelligible argument for it in your article.
On Jan 13 04:41 PM lbsterling wrote:
> "Gold has no risk"
> What about the risk of threat or cost of protecting it?
>
> In your world, gold goes up during inflation and up during deflation.
> When does it go down, actually?
>
> And if it just acts as a counterweight to inflation, where's the
> outperformance?
>
> I actually like gold as an investment but I don't think you made
> any intelligible argument for it in your article.
Gold has no financial risk in the sense that there is no obligation attached to it. The argument that there is risk to confiscation or theft can be applied to anything and therefore I don't know how to answer you.
If you study history you will see that gold does well in extreme inflationary and deflationary times. This is because there is a high degree of uncertainty during these times and therefore the demand for gold increases. You need to understand that gold is the ultimate form of currency. It has been and it always will be. My world is based on studying history which, if studied, provides insights into what we may expect for the future.
Gold has periods where it outperforms. Again study history. It is not merely a counterweight to inflation. It is money.
My article was addressing the common argument that gold naysayers usually point to the fact that gold does not pay any interest as a reason not to own it.
There will come a time when gold will not be the most important investment in my portfolio. Right now, I believe the risks in the system merit an overweight position in physical gold and then some gold derivatives and stocks.
I am pointing out a fact that now Treasury instruments (which were formerly considered "as good as gold") and therefore all it's derivatives, such as cash and deposit yields pay next to nothing. So that argument is now moot.
On Jan 13 04:49 PM lbsterling wrote:
> Risk of theft, I mean.
>