Tuesday, September 28, 2010

Treasury Bubble Troublesome; Gold Bubble Not

Two investment alternatives have been on a tear the last two years.

Gold and U.S. Treasuries.

The only difference between the two is that the bubble in U.S. Treasuries is VERY likely to pop soon leaving investors with substantial losses while the gold "bubble", if one can really call it that, looks like a long-term confirmed trend.

Today, the U.S. Treasury auction drew a record response at all-time low yields.  In other words, massive amounts of buying bid down yields to unprecedented levels.

On the same day, gold hit another record high, closing above $1,300 per ounce.

The difference between these two markets is that gold is a reasonable response to the deteriorating value of the U.S. dollar and other international currencies.  Why hold dollars which is falling in relative value when you can buy gold which is rising at double digit rates per year?

Treasuries, on the other hand, will lose MAJOR value when interest rates rise---AND THEY WILL VERY SOON and VERY RAPIDLY.

Think about it.  Would you buy an existing Treasury with a coupon yield of 2% when you can buy a brand new note yielding 6%, 10%, or more?

Warren Buffett has been warning investors for six months that the Treasury bubble is "one for the ages" and he's right but few investors are paying attention.

People want safe places to park their money.  Or as Will Rogers once put it:

"I'm not so concerned with return on my money.  I'm worried about return of my money."

With real estate a dead money investment and stocks iffy, investors are looking for places to put their cash.  The simple answer RIGHT NOW is:

Gold, yes.
Treasuries, no.