Long-Term Treasuries About To Decline

Includes: TLT
by: Avery Goodman

So far, given the announcement of the recent "Operation Twist," in which the Federal Reserve promises to buy $400 billion worth of long term U.S. bonds, the price of 30 year bonds have risen, and yields have gone down. That is about to end. The Federal Reserve is the most powerful central bank in the world, because it controls the supply of U.S. dollars and the short-term interest rates relating to the dollar, which is still the world's "reserve" currency.

"You can fool all of the people some of the time, and some of the people all of the time, but you can't fool all of the people all of the time." The Fed has managed to fool huge numbers of people into buying treasury bonds by engaging in repeated bouts of quantitative easing wherein it buys bonds with newly printed dollars, and supports prices. That is about to end, at least with respect to the longest dated bonds.

To commit to 30 years worth of holding a bond that pays almost no interest is something that only fools, and the Federal Reserve will do. The dollar may have gotten a temporary boost, in recent days, from the frantic buying by financial institutions that are short dollars, but that does not mean it is a long term safe haven. Within a few years, the dollar will almost certainly lose its status as the world's reserve currency because it has been mismanaged for so long. Right now, it is simply living on its past, relying on build-in demand to spark occasional rallies, like the one we are now in.

The best use of the current dollar rally is to sell into it, and not to buy long dated bonds or CDs that will only serve as a trap in a currency doomed to decline massively in the long term, in terms of buying power. It would be wise to use the dollar rally to exchange them for hard currencies. Hard currency is, of course, almost impossible to find in the world today, given the Keynesian orientation of most central bankers. Accordingly, the only viable place to park money is in precious metal which, at this moment, happen to be caught in a sudden downturn, and are becoming better buys as I write this.

In short, the value of the 30 year U.S. bond, because of the currency in which it is denominated, is going to decline massively over the long term. People erroneously believe that the market now likes the dollar and dislikes precious metals. But, the market's "honeymoon" with Operation Twist is about to end. The decline in the 30 year bond should begin this week or next. Wise investors will sell them at the current high, and invest the proceeds in precious metals. They should certainly not buy any more.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.