I’m going to try to blow some of the motes of distracting hype about bond yield rates clear out of your eyes today. Right now, we’re in the eye of the hurricane of the bond yield news cycle, and it’s a potentially dangerous place. I know, it’s exciting that bond yields are frantically rising. The as-seen-on-TV inflationary event is starting to unwind, right?
Well... not entirely.
Sure, it’s a small validation for people who have been trading in dollars for gold and silver. It’s even a bigger coup for people who sold bonds to buy commodity stocks. But bond yields could fall tomorrow. In fact, I’d argue that they’ve risen so far, so fast, that they’re probably due to fall tomorrow.
My point is, there’s no reason to become “extra-bullish” on gold just because of a bond-yield spike. My investment thesis for owning gold is a long-term one. It’s largely predicated on ignoring short term moves in bonds, the dollar - even gold!
For the record, I have been warning you that bond yields are due for a huge, long-term correction to the upside. Most notably, I made the following assertion on September 29th in an article titled “Why I Hope You Didn’t Buy Treasuries Yesterday”- just days before yields began climbing upwards:
I've argued before that Treasury bonds, notes and bills are all in a huge bubble. Some people claim that Treasuries can't be in a bubble, because when you buy a Treasury, you're guaranteed to receive your principle investment back.
This argument completely discounts the likelihood of even modest inflation nibbling away at your principle. After all, I don't think there are many people that would expect inflation to stay less than 1.26% over the next five years. In the event of double digit inflation per annum on average (like we experienced in the late 1970s) this five year bond could lose nearly 40% of its value.
That looks suspiciously like a bubble brewing to me. And the worse the inflation, the bigger the losses on this Treasury note. Yeah, you'd get your principle back, but it would be worth much less than it was worth five years prior.
The crux of my argument back then was that Treasuries were a really raw deal for bond investors. Unless you’re a day-trader, I see no reason to be long Treasuries. I still feel that way. And while I have been researching different ways to go short Treasuries, I keep coming back to my main thesis: the long-term trend for the dollar is plain old lousy. Buying gold and silver is a way to protect my bottom-dollars from further depreciation.
Shorting Treasuries is probably a great long-term bet right now, but I felt the same way six months ago - and had I bought a bond-shorting security back then, I would have lost money on it until just recently. So I’m not over-thinking the thesis at this point.
I’m using weakness in the price of gold and silver to continue to secure my net-worth from currency devaluation. I would suggest that you do the same.
Disclosure: Author long gold and silver