Gold or Bonds?
Research for Online Investors

by John Dalt

2/24/10

Big news this morning as Ben Bernanke, Federal Reserve Chairman, testified before the House Financial Services Committee.  Smooth talking Ben told us lower interest rates would be held for an extended period.  This was manna to the markets as traders bid equities higher on a cheap dollar.  News crept onto the trading floor that the Treasury’s auction of $42 billion dollars in five-year bonds did not go as well as expected.

Bernanke states interest rates will stay low for an extended period while the economy recovers.  Five-year bonds sell at a higher interest rate.  Hum.  Investors bought $44 billion in two-year notes on Tuesday aggressively, when the stock market was falling.  This flight to quality held interest rates down.  The longer term bonds did not do as well on Wednesday, pushing interest rates higher.

The Fed can control rates only as long as they are willing to buy Treasury bonds.  The purchase of treasuries is scheduled to end next month.  The Fed can still set rates for ‘fed funds’ but the cost of money between banks will not override the interest rates commanded by bond buyers.  The U.S. simply cannot finance its deficit spending without selling treasury bonds.

This is where the ‘bond vigilantes’ will come onto the field.  Greece wants to sell $5 billion dollars in ten-year bonds this week.  The E.U. finance ministers have offered to fashion financial backstops for Greece if they cut their budget deficit to 9% of GDP as opposed to the present 12.7%.  Greek ten-year bonds are presently yielding 6.57%, while German 10-year bunds yield 3.13%  U.S. ten year bonds presently yield 3.695%, more than Germany’s.

Greece has held their bond auction off the market, hoping for a perfect opportunity to sell them without paying a premium.  Bond vigilantes go where the yield justifies the risk, and shun fixed interest rates from governments that do not take budget constraint seriously.  Bond interest rates also reflect the safety of the underlying currency.  What will the currency be worth at maturity, compared to other currencies?

The greatest danger to the U.S. is loss of faith in the ability of government to control spending, resulting in inflation that reduces the relative value of the dollar.  This relative value is to other currencies, and also to commodities and precious metals.  Commodities such as oil, copper and steel are priced worldwide and are sensitive to the fluctuations in currency values.

We only have to go back to one of the maxims of investing, “It is not always the return ON my money, it is the return OF my money.”  If I am paid back in currency that has lost its value, I have LOST money.  Which would you buy?  A ten-year $10,000 bond paying 3.695 percent in U.S. Dollars, or ten ounces of gold?  Which do you think will be worth more in ten-years, in U.S. dollars?  I can give you a hint.  George Soros bought $600 million dollars worth of gold in December.  John Paulson is buying gold and gold .  Jim Rogers is holding gold and silver.

The easiest way to buy gold is the GLD etf, we also like silver. The easiest way to buy silver is the SLV etf. They are safe, they own the precious metal, it is in vaults. If you really must have it to touch, buy coins. I like to buy $10 gold pieces; they are one-quarter ounce of gold. Minted by the U.S. Mint circa 1994.  They are about the size of a nickel, easily valued, and if times get tough easily exchanged for goods I will value more than the gold.

The Mailbag is full on our Healthcare Safety Net:

“This is a great fix for our health problems. It addresses so many problem areas, and it isn't 2000 pages long.!”— paid up subscriber G.C.

John’s response: Too easy, it will never be considered.

“This is an excellent article!!!   Suggest you send it to ALL members of Congress and White House personnel working on Health Care.”—paid up subscriber D.W.

John’s response:   We have some member’s staff as subscribers.  Wouldn't it be fun to see some of the ideas used?

“Very Good”---subscriber M.C.

“I for one find almost all answers to the health care insurance crisis to be collectivist and immoral, including your proposed program.”—subscriber P.N.

John’s Response: The battle is lost on health care being a right.  People can go into a hospital and get it free.  My proposal is to remove that right.  Provide free health care only in a government run health clinic.  It would not be first class.   It will be bad enough that people would want out, which means they would have to buy insurance to take care of themselves.

“In general, your column reflects traditional Republican thinking-long on bluster, short on workable solutions.”—subscriber A.J. MD

John’s response:   I am a conservative, not a republican.  I never said you could not give free medical care, just that you should not be forced too.

“Yours is the most well reasoned and understandable approach that I have seen.”---subscriber B.D.

"Democracy and socialism have nothing in common but one word, equality." "But notice the difference; while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude ." -Alexis de Tocqueville

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Home Page

Back to Top