Friday, June 03, 2011

Buy Treasury Bonds or Buy Gold

Buy treasury bonds or buy gold? That is the question. Treasury Bonds have always traditionally been a safe haven to preserve capital. At least up until now. Times change however and now treasury bonds are looking very shaky indeed.

US Treasury Bonds have, for years, been considered the safest bonds or way of saving money in the world. The U.S. government has never, to date, defaulted on a loan. One has always been assured that one will be paid back on US treasury bonds. U.S. government bonds have always been considered among the safest in world. Also called Treasuries, the interest payments, although extremely low, are exempt from local and state taxes even if not from Federal income taxes.

Although it is extremely unlikely the US government would default on repayment of Treasury Bonds, the value of putting ones assets into them is now in question.
In short Long term bonds are going in the opposite direction to gold.

The chart above shows the real picture. While treasury bonds, once the benchmark for asset preservation, are now flat, gold has increased around 25 percent more than US Treasury Bonds.

The chart shows the green line representing the price of one ounce of gold (GLD), measured in U.S. dollars. The blue line represents the price of long-dated U.S. Treasury bonds (TLT), also denominated in U.S. dollars. In terms of dollars, gold went up about 25% over the last year. Treasury bonds were flat.

The importance of this shows up in the interest rate paid and the value of the dollar as against the value of gold. It may sound simplistic but the more the value of the dollar decreases the less each dollar is worth. The less each Treasury bond is worth also and the less value each dollar of interest becomes.

This is distinctly different to the value of one ounce of gold.

The spot price of gold is set each day in London and called the "gold fix." This is the price at which members of the London Bullion Market Association (LBMA) will readily sell gold. Although this was the tradition for many years the price these days, is now "fixed" in three currencies: dollars, euros, and pounds. So when you ask what the price of gold is now, you are more than likely to get that day's "PM gold fix" price fixed each day at 3 p.m. London time to coincide with the market open in the U.S.

Porter Stansberry of the Stansberry Report stated, "People demand gold when their local currency becomes unreliable. People demand gold for savings during periods of global uncertainty. But most importantly of all, people demand gold when they no longer trust their government… which explains the antipathy between government-backed central banks and gold."

“The prices of U.S. Treasury certificates (especially the long-dated variety) are heavily influenced by inflation expectations. To understand why, you have to remember the coupon payment on bonds is fixed. So if the Treasury issued a new 30-year, $1,000 bond today, at current interest rates, an investor would be paid a coupon of roughly $17.50 every six months. That represents a 3.5% annual interest rate. The bond would be said to trade at "par" at this yield.”

Say for example an investor buys a 30 years $1000 bond today at current interest rates. He will receive, at the end of the 30 year period, a total of 60 coupons totalling 1050 dollars in income. So with the principal an investor can expect 2050 dollars in total for the privilege of investing 1000 dollars for 30 years. Not the healthiest return and when you consider the impact of inflation you can expect a real value to the investor over all of a return (including capital) of around 580 dollars. A humungous loss for the investor.

Compare this to the value of gold increasing over a 30 year period. From under 100 dollars to over 1500 dollars. A 1500% increase minimum.

As Porter Stansberry states, "This chart lays bare the false claims of our politicians, bankers, mainstream economists, and media that the economy is recovering, our debt levels are manageable, and the American way of life is safe and sound."

And to answer the question, buy treasury bonds or buy gold, it seems obvious that an increase of 1500 percent is far healthier than a loss of over 1500 dollars.

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