Gold Vs US Bonds - Which Do You Believe? (Do you believe the message of Gold, or US Treasuries?)

Any psychoanalyst looking at the behavior of investors today would see clear strains of schizophrenia in a comparison between the markets for gold and US Treasuries.

Currently, the 10-year Treasury yield is setting new lows on a daily basis. In the financial models all economists were taught at school, this would be an indication of an economy with low inflation expectations and a strong currency. But the dollar has fallen over 12% since June, and the price of gold continues to hit all-time highs. These results are completely antithetical. Bonds are flashing a warning sign of deflation, while gold and the dollar presage inflation.

During the last period in which the US experienced significant economic stress, the late 70's and early 80's, the markets in gold and Treasuries showed a much higher degree of harmony. At that time, the Fed's extreme depression of interest rates led to rapidly rising inflation, a weakening dollar, and a massive spike in the price of gold. More significantly, yields on Treasuries soared as investors demanded higher rates as compensation for the added inflation risk. In other words, everything made sense.

Beginning in January of 1977, gold began an epic bull market which ended just prior to February of 1980. In that time, the metal soared from $135 per ounce to just under $860 per ounce, and the Dollar Index lost about 20% of its value. Yields on the 10-year Treasury soared from 7.2% in January of 1977 to 12.4% in February of 1980. This occurred in an environment where the Federal Reserve - under Arthur Burns - pursued an inflationary monetary policy. He increased the monetary base from $62 billion to $114 billion in just eight years.

Folks,

If you look at what the markets are telling us in regards to :

1) The surge of Gold and Silver 2) The devaluing of the USD

It seems that there is the EXPECTATION that the Fed wants to foment robust inflation.

However, there is another angle --- Treasury investors seem to believe that despite its current inflationary disposition, the Fed will be able to either:

A) hold down interest rates for an extended period or B) withdraw its liquidity before things get out of hand.

To believe A and B above, one would have to not only believe that the forex and gold markets have it wrong, but also think that the Fed's printing press will lose its power to depreciate the currency.

I'm not sure if this assumption is valid.

RE: the monetary base has doubled in TWO years, rather than eight

Many investors are believing that inflation has not been ignited because the CPI does not reflect it.

What we should consider is the funds are caught in the BANKING SYSTEM and not spreading among the populace.

And as you show, M1 is up 6.2% Year ove ryear; and, in the last two months, the compounded annual rate of change in M2 is 7.4% !!

Although these single-digit increases do not yet indicate runaway inflation, a program of relentless quantitative easing will be similar to your analogy — a driver smacking into a wall at 80 MPH.

Thus far, Bernanke has not shown any will to hit the brakes.

I believe anyone with good sense will be crazy to ride the US treasury yield curve.

SOME THOUGHTS AND OBSERVATIONS:

The entire global economy is based on debt.

Money is Debt.

There is more debt owed than money exists.

Money is created from nothing, and is not reserves “lent out”.

All loans are brand new money.

If everyone saved even $200,000 for retirement, there would be no money in circulation.

Idaho voted down to have silver as legal tender.

There are now Gold Coin ATM machines.

In the 1800’s all silver was taken out of circulation reducing the money supply by 80% causing a recession and foreclosures.

Since the 1970’s, the last remaining gold standard was gone.
Fort Knox hasn’t been audited in decades.

When Ron Paul announced he was working on an audit Fort Knox bill, I don’t think that went anywhere. But I started to buy Gold as soon as this came out.

Since 2003 the amount of US dollars in circulation has increased dramatically. And, especially with the housing “boom” where you could pay almost nothing down, then your house goes up in “value” and then you can take out a new loan based on that new value. This was all new money, going into the economy. Then banks shut off credit, and the money supply of the citizens got smaller, so the government made up for it with a trillion dollars or so in “Stimulus”. But the REAL reason was to keep inflation going, since without inflation, the government is bankrupt. But with inflation, the overseas debts, and all debts are easier to pay, since all prices go up, but not the debt.

So, what can I say ? THE NUMBER 1 EXPORT OF THE UNITED STATES IS INFLATION !!

How? By Sending money overseas, to factory workers in China. This causes inflation, overseas as well. Many other nations export inflation as well. But the Us is just the biggest.

So, you can account at least 3 - 5% of the entire Dow of S&P 500 per year, compounded for 97 years. This is the real reason why buy and hold eventually “works out”. But, a gold coin holds its value almost as well as the Dow or S&P 500.

But prices are going up everywhere. And that inflation eventually goes into stocks too. That’s why stocks are going up, but the economy isn’t.

IMHO, It’s also why this is a very good opportunity to lock in record low rates on a house, in the 200,000 range. Because in 10 - 15 years, it could be worth $400,000 in inflated dollars. It won’t make a difference in “real terms”, but what might, is that rent also goes up, and you’ll start making a lot more in monthly rent than the monthly payments.

SO yes, , now is the best time ever to buy a house in a college town and rent it out. You eventually own if for free, or ever better. For free with monthly payments to boot.

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