Velocity Of MZM Is Slowing Down: Good Time To Buy Treasuries?

Apr.29.12 | About: iShares 20+ (TLT)

In one of my previous articles I monitored the velocity of MZM in an attempt to see whether Treasuries were likely to go up or down.

There is a correlation between the velocity of MZM and the Treasury yields. When velocity goes down, so goes the Treasury yield. The new numbers of velocity of MZM are out (for the previous quarter) at 1.434 (Q1 2012) (Chart 1), down from 1.451 (Q4 2011). This is a slowdown of about 1%.

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Chart 1: Velocity of MZM (latest: Q1 2012)

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To me this indicates that Treasury yields in the U.S. are likely to go down further, while the economy continues to slow down.

On the other side of the equation, we see that MZM money has been increasing at a rapid pace (Chart 2). From 2011 to 2012, $US 1.5 trillion money has been created as can be seen on chart 2, which is a 15% increase from a year earlier.

Chart 2: MZM Money Stock

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If we consider the quantity of money theory: M x V = P x Q (Money Supply times Velocity of Money = Price Level times Quantity of Real Output), the outcome is still highly inflationary after adding both charts up. The price level of goods will go up dramatically.

It isn't a bad idea to go into U.S. Treasuries (NYSEARCA:TLT) at this moment, considering the slowdown of MZM velocity (Chart 1). But looking at the amount of money printed (Chart 2), I believe it's much safer to be in inflationary assets like gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV).

Disclosure: I am long PHYS, PSLV, AGQ.