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There’s been a lot of chatter lately about a gold bubble. But I think you can make a much stronger argument that Treasuries are in the midst of history’s biggest bubble right now.

Let me back up, because I know I’m making some short-cut assumptions that you might not make for yourself.

  1. I’m assuming that gold IS money. That is, it’s a store of value and a medium of exchange.
  2. I’m assuming that the definition of a bubble describes when an asset is overbought to the point that its price is much, much higher than it should be.
  3. If I can safely make these assumptions, then I think it’s fair to compare gold to another form of money: the dollar, and by proxy U.S. Treasuries.

If we can agree that U.S. Treasuries are a fair proxy for the dollar, and that gold is money - then I truly struggle to see how ANYONE can come to the conclusion that gold is in a bubble, while simultaneously seeing Treasuries as not being in a bubble.

Here’s why:

In 2009 the total amount of gold mined, from every mine, in every country for the whole year amounted to $90.6 billion. That was about 90 metric tons more - or a little under $3.5 billion - than the amount mined in 2008. If you’re keeping score, I’m using gold at $1,200 an ounce as my price point.

That $90.6 billion includes all gold for electronics, jewelry and bullion.

According to the 2008 US Geological Survey, less than 10% of all gold is turned into bullion - most of it becomes jewelry, or is used in dental or medical services.

So it’s safe to say that only about $9 billion worth of gold was turned into bullion last year - maybe a little more, but not much. The U.S. mint only minted about $1.7 billion worth of gold into gold eagles, buffaloes, etc.

So, let’s round it up to an even $10 billion worth of gold bullion sold last year. That’s small potatoes, really. Forbes magazine publishes an annual list of a few dozen billionaires who could each buy all of the world’s annual bullion production. Our Federal government actually loses more than twice that every year.

So $10 billion seems like a drip in the ocean.

In any event, that $90.6 billion of new gold in world circulation is still a tiny number, especially when you compare it to the amount of money going into US Treasuries today.

A recent article in Business Week reminded me of the size of the Treasury market:

The government will auction $69 billion of the maturities next week, according to the median forecast in the survey, compared with $70 billion last month and a record-tying $81 billion in February.

So at the current sales pace, the U.S. Treasury will sell at least 10 times more Treasury notes than the total amount of gold produced this year. But that’s just U.S. bonds - it doesn’t account for any debt sold out of the Euro-zone, or Asia, South America, Africa, or Australia - which is nothing to sneeze at.

The chart below (click to enlarge) shows how US Treasury sales have ballooned over the past 10 years:

Meanwhile, gold production (and sales) has stayed relatively flat:

Total Gold Production In Metric Tons (2003-2009)

2003

2004

2005

2006

2007

2008

2009

2,420

2,470

2,370

2,370

2,280

2,260

2,350

Right now, Treasuries are still selling near their record high prices. The yields are near all time lows. There’s huge demand for Treasuries, and both in volume of sales as well as growth of sales, Treasuries dwarf gold.

If you’re eschewing gold, but buying Treasuries (especially long-term Treasuries) I’ve got to wonder about the thought process - especially as more and more sovereign debt issues spring up across the pond. Today Portugal’s debt just got downgraded, and if you think the Atlantic ocean will protect us from the same exact problems, then I guess you should keep buying Treasuries.

It’s worked so far.

Drop me a line if you feel inclined to set me straight.

Disclosure: Author is long gold and silver

Source: Gold vs.Treasuries: What's More Overbought?