Ever since tulip bulb mania in Holland, speculators have always managed to find commodities or financial paper on which to wager their hard earned money.
Two of the biggest overvalued trades today are gold and US Treasuries.
Both are deemed safe havens by a constant stream of “experts” who continue to paraphrase old myths, which over the years, have become media-driven truths.
However, both trades are fear driven and since fear itself is an illusion, in actual truth, the valuations of both gold and Treasuries are only valid as long as the media reports can continually pump up the valuations, by fear driven hype and sensationalism ...
If gold was traded purely on its value for industrial use and jewelry, then the price would not be more than $400.00 an ounce. However, gold is traded on the stock market via ETFs such as GLD
and this ease of trading has given rise to far more speculation than was available solely on the commodity markets.
Before the onset of 24 hour forex markets, there may have been a case for the myth that gold is a second currency and a safe haven in times of chaos. However, today we have 24 hour currency markets and if one currency is weak then it can immediately be traded for a stronger currency that has the potential to go higher. Not only can currencies be traded on commodity markets, they can also be traded on the stock market in the form of ETFs, such as FXB
for the British pound and FXE
for the euro.
The second myth is that gold can protect the holder in an Armageddon-type scenario.
Once again, this is bogus information, because anyone who is holding gold when the financial structure is collapsing, would become a target of every mob looking for anyone holding valuable assets.
In olden days, people traveling with gold coins were held up by highwaymen and robbed. So, far from being a safe haven, gold becomes a magnet for robbers and thieves.
The third myth is gold is a safe haven in a hyper inflation scenario.
This may have some validation, however, all commodities and stocks will have a higher valuation, not just gold. Since a stock such as Intel (NASDAQ:INTC
) does yield a good valuation compared with gold, maybe Intel is a far safer haven than gold?
To find the real value of gold, let’s take the Industrial/Jewelry - supply/demand, par valuation of $400.00 and measure that against the value it is trading at now of $1600 an ounce. On a PE basis valuation, it would have a valuation of 300. Intel’s PE is 10. Using that yardstick, which investment is safer and makes more sense?
US Treasury Bills and Notes
This one is easy to sort out by answering the following three questions:
- Does the current group of USA politicians instill confidence in the public?
- Is 4.25% a fair risk/reward return to holders of a 30 year Treasury in a country with 14 trillion debt?
- What will happen when the rating of USA debt is downgraded to less than AAA and pension funds have to sell their holdings?
Bill Gross, the head of the biggest bond fund in the world, has called US Treasuries a big Ponzi scheme.
The safe haven perception is wearing thin, via the latest farce in Washington. With the clumsy attempt to raise the debt ceiling, it may be a case of the world's confidence shaken and stirred into action by selling Treasuries with such low yields.
Low interest rates do not instill confidence in any country and the crisis in 2008 is well past.
Banks are more stable and a raise in interest rates may instill more confidence in the economy.
It will also give savers more money in their pockets with which to buy more goods, which in turn, adds to a better GDP.
Today there are superior and safer investments in the stock market than gold and Treasuries and investors who spot them sooner, rather than later, may reap the best and happiest returns.Disclosure:
I am long INTC