Tuesday, March 22, 2011

Is Gold Now The Last Safe Haven Standing ?

Gold usually must compete with other choices for safe haven money. Bonds, real estate, and the world's reserve currency, the US dollar are the chief rivals. Real estate has become a troubled no man's land for investors. Bonds have been very popular, but now many people, using the term "bond bubble", are turning on them, including none other than Bill Gross, the biggest bond fund manager in the country. He has now become an outspoken critic of the federal deficits and the Fed's loose money policies. In a gurufocus.com piece, he states:

"...nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns. Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the
Fed doesn’t?

Gross is still bullish on some corporate bonds and foreign bonds, or any bond not denominated in the USD. But aren't even the best corporate bonds denominated in the dollar? And what about the dollar as safe haven? Why should we worry? It has been weakened by an oversupply, but don't investors still flock to this safe haven in stock market downturns? Well, no actually! Take a look at how the dollar behaved over many of the recent stock market sell-offs, then compare these to what it's doing in our present correction:

There seems to be a quandary over the safe haven flight nowadays. Money doesn't want the dollar anymore, as the above chart clearly shows, and bonds - well they are fast becoming a pariah. Cash is beginning to severely under-perform real inflation. It seems all the alternatives to a 1% return on cash are coming to suffer a malady know as "counterparty risk". Whether the counterparties are named Madoff, Ponzi, or Bernanke, the markets are getting into a mood where they want to have nothing to do with them.

The word "counterparty" was once one of those fine print words you didn't concern yourself with much unless you were an attorney. Now they are becoming investor enemy #1. Is the counterparty over? They have a really poor track record versus gold, and this is coming to be a front and center focus among investors:

This is just the casualty rate the last hundred years. Over the last 5000 years, this would be a much busier chart. Will our foolhardy counterparties of today fare any better ? I have my doubts. They seem to be much more talented fools with computers to help them.

When George Soros made his famous comment about gold being "the ultimate bubble" in January last year at the World Economic Forum in Davos, Switzerland, it was not in a derogatory sense as was commonly thought. He was essentially referring to gold as the last safe haven standing after the housing bubble, the bond bubble, and all the other bubbles have been decimated by our modern day counterparties. He meant "ultimate" as in "last in a series". "Gold is the only actual bull market currently" he told Reuters but stressed that it won't last forever. While it's true that he has described gold as "not safe", this must be taken in the context that, in his words, "this is a period of great uncertainty, so nothing is very safe".


  1. were is gold price going to now tell me peter4like1@yahoo.com

  2. If you look through my recent post "Gold Technical Update" of August 10, you can see a lot of evidence that gold is now going into a new,stronger phase. David Nichols' fractals are saying a run to a top in October, then some consolidation.

    The overall bull market looks to me like it's not at an end, even with powerful runs that make traders nervous (see my Seeking Alpha article "The Big Gold Stock Disconnect"). If we resolve the global debt crisis with some form of gold backed currencies, the gold price would probably have to rise many multiples from here.