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Thursday, December 13th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

If Inflation Is So Rampant, Why Are Treasuries and Gold Both So Strong?

As many of you who read my articles know, I call things like I see them. If this means going against the norm sometimes, so be it. What I see from your typical gold bulls is the same inflation mantra and the shouts to “buy gold because of all the inflation,” with inflation defined as an increase in the money supply. While I agree with the long term aspect as to why there will be more inflation, there is still much unwinding to do of the credit created during the expansion era. This unwinding is actually deflationary, as one has to ask themselves– why are treasuries acting so strong?

Gold, silver and treasuries have been strong because of this “flight to safety,” not as much from inflation although, as I said, there is reason to fear inflation. Yes, there are higher prices in some areas (food and energy), but treasuries haven’t grown weaker over the past few years, but stronger. If inflation is so rampant, then why are treasuries so strong? If inflation is not as rampant, then why has the price of gold moved so much higher? To understand where I am coming from, it would be beneficial if you first read Dollar vs. Gold In A Dual Inflation-Deflation Economy.

Flight To Quality

One of the reasons treasuries have been strong is a flight of money out of banks. Banks seek to hide their problem assets via mark to fantasy valuations, as they take on more risk via the derivatives market while trying to make a profit. How can one trust a banking system where blatant lying on balance sheets occurs due to a change in rules by the Federal Accounting Standards Board (FASB) in order help out the poor banks who mismanaged their assets. These banks took on too much risk as a result of congress passing legislation that allowed them to fractionally lend more than in the past.

Banks then get bailed out by tax payers, but they use that cash to shore up messed up balance sheets, pay executives big bonuses and– since they know the Fed has their back– they now play the derivatives market to make a buck, as they can’t make money by lending to anyone with a pulse, like they used to. They are left to find the few souls left who think the American dream of owning a home still means what it used to, implementing their now stricter lending rules and credit scrutiny. That market has dried up. The derivatives game is where the action is.

Do you really trust your money in these banks that take such risk? This is exactly what the nation’s top 5 banks are doing, and the $4 trillion they have in sub-investment grade derivatives are now more than at the height of the financial crisis.

When the economy was expanding during the credit expansion era, it filled the economy’s financial balloon with air. Now that we are contracting as an economy, despite quantitative easing efforts by the Federal Reserve to keep the balloon economy filled with air, the balloon is actually letting out air and the economy deflating. The first round of quantitative easing was virtually non-effective and the second one has propped up the stock market, but that’s about it. Now even that is deflating and I’d be selling on any rallies.

The Dollar Hasn’t Capitulated Yet

Earlier this week I wrote an article entitled Why The Price Of Gold Could Move Lower Short Term. I mentioned that the Dollar Index looked like it might bounce, causing some pressure on gold and silver prices. The next day, gold and silver fell and Wednesday saw the prices rise and then fall again, as the Dollar Index continued gaining strength. In this next section, I will expand on this with an analysis of treasuries. I’ll explain how the run to safety trade is still live and well, despite any current pullbacks in the price of gold and silver. If you think the current run in the price of gold and silver was something to behold, wait till things really start to unwind. The treasury market might give us some clues as to what is happening now and what is to come.

But What About OPEC Selling Treasuries?

March 14, 2011 it became known that OPEC had actually been selling U.S. Treasuries to the tune of 9%.

“Treasuries owned by oil producers and institutions such as U.K. banks that are proxies for Middle East nations fell 9 percent in the second half of 2010 to $654.6 billion, the first decline in the final six months of a year since the Treasury Department began compiling the data in 2006.”

If you hear the news today, its old news. Six months into 2010, the Dollar Index was north of 88. Is it any wonder OPEC was dumping the dollar? Now that the Dollar Index is just south of 77, what do you think OPEC is doing? Do you think they are in the three major currencies that have had a nice run– the Euro, Yen and Pound– or do you think they are buying the dollar now, which is closer to its channel bottom with the propensity to move higher?

What Do the Treasury Charts Tell Us?

The 10 year chart below shows the treasuries getting stronger of late as the yield has dipped to 3.21%. This, despite oil prices that went to over $100 a barrel. Maybe OPEC has been buying.

Click to enlarge

The 30 year Treasury Chart below shows the same result with its yield now down to 4.44%.

Click to enlarge

Relating Treasuries To Gold Price Action

You can see from the above two charts that both the 10 year and 30 year treasuries were yielding double digits in the late 70’s and early 80’s. During this time we saw gold go from the $100 an ounce rage to its closing high of $850 in January of 1980. Today we see the 10 year treasury yielding 3.21% and the 30 year yielding 4.44%, while gold has moved higher the last 10 years– now trading around $1,400 an ounce. Silver has also had a nice run as it did in the late 70’s.

Why have gold and silver both moved higher all the while the treasuries have moved higher? The answer is that human action has seen investors move to perceived quality and wealth found in treasuries and real wealth found in the precious metals. This can be illustrated in the inverse pyramid below, via Trace Mayer’s good work.

Click to enlarge

The fact that all of these illusions of wealth are chasing such a small amount of the real wealth found in gold and silver can only mean that the price of gold and silver have much further to rise. There is a lot more paper chasing gold and silver today than there was in the late 70s.

When treasuries do start to weaken, it would behoove you to already have your position in physical gold and silver established. Any pullbacks should be used as an opportunity to either add to a current position or make your first allocation into gold and silver. The best gold and silver metals to buy are the ones that have the lowest spread to the spot price, which are bullion coins and bars. I prefer bullion coins to bars because they are recognizable and easily liquidated, should the need arise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Long Physical Gold and Silver

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