Lonestar1

De-Leveraging Is Not Deflation

Even during war, a person would be willing to exchange his gold for the currency being used. But he is going to exchange only the amount to get by, not the whole amount he has. Of course, he can pay in bullion gold, if not for the problem of decimal inconvenience. The point is, he wants to hold on to his gold.

This would also be the case in an economic calamity when people believe gold may be the only trustworthy form of money.

It's all about the trust, whether it's gold, $, Yen or Sterling. Back in 80's, if you traveled in any 3rd world countries, they would be very happy to be paid by $ instead of the local currency. This is not true any more.

The theory of gold backwardation explains this well. It shows two things:

(a). demand outweighs supply in spot market,

(b). Supply by short in futures market is subject to increased probability of default as the short either has no gold, or tries to default and let the long suit.



On Jan 21 09:42 AM joegold wrote:

> one question, one only. Everyone says all fiat currencies will fail
> fine. Gold is the answer fine. IF this is the case, and the dollar
> and all other fiat currencies are worthless paper...why would anyone
> ever exchange one tenth of one millionth of one ounce of gold for
> paper money? I am not trying to be snarky, I am just trying to understand
> the argument.

Treasuries' True Risk

Treasury yields were pushed down so low by institutional investors, not by individual investors. Yes, it makes no sense for individual investors to buy Treasuries of any maturity at such radiculous yields. One can get better rates on bank CDs. If anybody is arguing about the risk of the banks, then one can argue about the risk of brokerage accounts used for holding Treasuries.

Institutions, with multi-billions dollars to park somewhere, have no choice but buying Treasury bills, even at slightly negative yields. No other instruments can offer such convenience and liquidity at $ billion levels.

That being said, I am holding all positions the author holds. But the near term breakdown on Treasuries can not be expected.

The first Trigger for such break should be from institutional investors when risk taking activities rise more forcefully. So far, such activities can only be observed at a moderate pace in corporates bonds, MBS and some distressed assets. These insititutional investors are acting as vultures.

More decisive break would be after Stock market reaches the cycle bottom. Frankly, we don't know where is the bottom.

The final blow would be the dumping by foreigners. But this is not an economic event. It is a partial phaseout of $ and would imply geopolitical realignment. There may be some clue at the next G20 meeting.

Which Black Swan Will Pop the Treasury Bubble?

Dumping of Treasuries by Foreign central banks is not a pure economic event. One should look for clues in strategic arm twisting among the world's largest geopolitical power brokers.

On the same basis, doesn't it make everybody wonder why Tokyo-Mitsubish (?) executed its $9 billion investment in Morgan Stanley for a 20% stake while they can withdraw without any penalty? More ironic is that the same Japanese bank raised capital for its own capital adequacy..