Are Gold and US Treasuries in Conflict?

As a number of observers watch both Gold and Treasuries go higher in price, they’re concluding that one of these asset classes must be wrong. I can certainly understand that view. Over the past year, I have written several times that the 27 year bull market in US Treasuries most likely ended in December of 2008. However, a great portion of my skepticism on the prospects for further US Treasury price appreciation arose not only from supply, but, from the collapsed capital flows associated with depression.

My reasoning, starting earlier this year, was as follows: in a world of reduced trade, less dollar reserve building would ensue–thus less sovereign support for US Treasuries. In addition, I also reasoned that Americans, now trapped by debt and job losses, would also not be able to support Treasuries through savings. Each of these conditions have come to pass. Trade did collapse. Less dollar reserve building did ensue. The Agency market and the long end of the Treasury curve have largely been abandoned by foreign reserve managers. Equally, in a world of 1.5-2.0 trillion dollar deficits, the year-to-date savings rate of Americans at 446 billion while an increase over previous years is not enough to support our government spending. Not the last fiscal year, nor the fiscal year to come.

My current view is that Gold and US Treasuries are both partaking of the same surge in liquidity, now washing over most asset classes. Again, had this been a standard recession, I would have been happy to be bullish on US Treasuries right from the start. But my central thesis was that US Treasuries were a dangerous asset class as rising supply met crushed trade flows. The Federal Reserve can claim, and people are free to accept, that their 1.25 trillion purchases of Agencies and 300 billion purchase of US Treasuries are simply monetary and liquidity operations. But that doesn’t make such a restrictive, narrow claim true. The FED actually had to make those purchases to avert a funding crisis.

Only initially, therefore, did US Treasuries express the macroeconomic outlook for an industrial collapse, and depression. Once that panic phase reached its zenith last December, then Treasuries had to exist in the same world of shrunken trade flows and liquidity that affected other assets. But this leads us to a question: if liquidity has indeed now returned as evidenced by asset reflation, then, an opportunity should open up again for the Treasury market to express a macro view. And today, one wonders that a hint of this view may be coming to light.

GOLD vs UST Price 18 Months

My friend Mike Stiller, a keen macro observer, pinged me today and alerted me to a change taking place in the above ratio of Gold to the price of the Ten Year Treasury. This chart shows that after a year of crisis, the purchasing power of Gold to the US 10 Year’s price is breaking out to a new high. This is probably going to be more exciting for the technical trader, but thematically I think the longer, macro view is also informed by such a change. After all, it has indeed been a very big week for the Dollar, Gold, and asset inflation generally. Indeed, it almost feels like a quiet crisis is unfolding as a decade of haywire(d) monetary policy looks ready to finally get some very nasty feedback from the biggest market of all: the US Treasury market.

I suspect that the liquidity surge, which is now coursing dynamically through the system, is going to keep pushing assets forward with less regard to a macro view, and more with a regard to restoration from the acute phase of the crisis. And while the US Treasury bond market has too many participants to accurately characterize, it seems likely that if the kind of message expressed in the above chart persists, that a recognition phase could finally unfold about the solution we chose for our collapsed economy.

-Gregor

  • http://www.truthingold.blogspot.com/ DaveInDenver

    The Fed purchased 50% of all Treasuries in the 2nd quarter. We haven't seen the numbers for Q3, but it's probably comparable. Flight to safety money and China have been flooding into the short end of the curve, the Fed has been monetizing the longer end. That is affecting the 10yr rate more than most realize.

    It will be interesting to see whether or not the Fed expands its $300 billion Treasury purchase program, which is close to the $300 billion limit.

  • http://twitter.com/mika2k1 mika2k1

    The crowd is always wrong. And when CNBC is talking gold, you know youz gonna get washed out.

  • Bernard_S

    Could you explain exactly what you mean by “…and more with regard to restoration from the acute phase of the crisis…

    Thanks

  • http://www.marketfolly.com marketfolly

    Excellent read Gregor, thanks. Accrued Interest took a look at the 10 yr as well: http://accruedint.blogspot.com/2009/10/treasury

    Interesting to see certainly, and the flight to short term treasuries is notable as well.

  • http://economic-undertow.blogspot.com steve_from_virginia

    Stocks and Treasuries are at odds as well, stocks are inflationary in and of themselves, Treasuries are announcing deflation and are very pricey, indeed, particularly 30yr.

    But, I think the finance markets are in their own world, far removed from the constraints of more and more expensive energy and declining wage- earnings. Maybe there is too much emphasis on the Fed, I have to admit to this, myself.

    Finance is a liquidity machine right now, the opportunity for any market to assess reality will get pushed ever farther into the future.

  • Stubos

    If only it were that simple. I like to have contrarian investments, looking for the thing no-one is paying attention to as a potential low-risk bet. This is not the case if you are going against gold. Betting against the trend is a really bad idea, even if it is the flavor of the day/month/year for the bobbleheads on CNBC. Find some out-of the money yet solvent natural gas play or something like that, stay out of the way of the gold bull or jump on the wagon, it looks higher.

  • http://twitter.com/mika2k1 mika2k1

    Those that are pushing gold, bought it at $400. Although there's talk of the “China put”, personally, I don't believe China is so stupid as to further waste its dollars on gold. The anglo-american imperialist machine is now completely exposed as financially, morally, and culturally bankrupt. Further gold manipulation is pointless. The political point has already been made.

  • Stubos

    If only it were that simple. I like to have contrarian investments, looking for the thing no-one is paying attention to as a potential low-risk bet. This is not the case if you are going against gold. Betting against the trend is a really bad idea, even if it is the flavor of the day/month/year for the bobbleheads on CNBC. Find some out-of the money yet solvent natural gas play or something like that, stay out of the way of the gold bull or jump on the wagon, it looks higher.

  • http://twitter.com/mika2k1 mika2k1

    Those that are pushing gold, bought it at $400. Although there's talk of the “China put”, personally, I don't believe China is so stupid as to further waste its dollars on gold. The anglo-american imperialist machine is now completely exposed as financially, morally, and culturally bankrupt. Further gold manipulation is pointless. The political point has already been made.

  • suldog

    Steve,
    The treasuries are announcing inflation because their yields are being held aritificially low by Fed purchases and by swaps for US agency debt from foreign govts … the unbelievable manipulation continues.
    http://www.chrismartenson.com/martensonreport/s

  • suldog

    Woops, meant treasuries announcing “deflation”!

  • http://sellgoldonline.org/ sell gold online

    I definitely agree with this. I expect that treasuries will still facing more deflation as time goes by.

  • http://sellgoldonline.org/ sell gold online

    I definitely agree with this. I expect that treasuries will still facing more deflation as time goes by.