Don't Flock to the Wrong Safe Haven
The Fed is presently responsible for purchasing 70% of U.S. Treasury debt issuance. Are we to imagine that sufficient buyers await to fill that void immediately upon termination of the $600 billion QEII program? Of course no such buyer/s exist to smoothly absorb the slack, and to make matters worse one of our leading foreign creditors (Japan) will not exactly be in buying mode. It's a nightmare scenario for bonds, and it's why PIMCO pulled out of Treasuries entirely.
Under the circumstances, they are no safe haven. Even if Bernanke decides to pass the baton straight to himself with a QEIII, the resulting loss of confidence in the dollar and the expectation of true hyperinflationary scenarios would lead prospective buyers to shop elsewhere for their safe haven assets ... and gold and silver will continue figuring into those calculations with greater visibility amid a fresh surge in prices.
Gold and silver in this environment present a far greater safe haven than do Treasury bonds. Those who make this realization sooner rather than later will avoid being burned by one of the greatest potential bubbles of our lifetimes. Buy gold, silver, and related equities.
The case against Treasuries
Amid Tuesday's global market retreat triggered by the series of devastating events impacting Japan (the world's third largest economy), a move into Treasuries appears counter-intuitive on multiple levels. For starters, consider that noted bond trader Bill Gross revealed a complete liquidation of U.S. Treasury bond exposure from PIMCO's $237 billion Total Return Fund just days before the magnitude 9.0 earthquake and resulting tsunami struck Japan last Friday. Explaining this rather unconventional move, Gross posed the rhetorical question referring to the looming termination of the Fed's $600 billion QEII program of direct Treasury bond purchases: "Who will buy Treasuries when the Fed doesn't?"
Treasury secretary Tim Geithner sought to reassure markets Tuesday by opining that Japan would not need to liquidate Treasury holdings to fund response and reconstruction efforts, but that frankly skirts the larger question of whether reduced Japanese demand for U.S. debt may exacerbate an already difficult transition from the QEII program (under which the Fed has purchased some 70% of all U.S. debt issuance).
Furthermore, because I believe that U.S. economic recovery was already skating on perilously thin ice, I agree with economist Robert Shiller that quake-related interruption to Japanese economic activity could prove something of a tipping point for world markets. I submit, further, that these events may reawaken stimulus-sedated distress in debt-burdened economies like the United States, the United Kingdom, and Europe. Facing the likely prospect that demand for Treasuries will be wholly insufficient to replace the Fed's dominant share of current bond purchases -- as paired with potential stock market declines, rising gasoline prices, and other potential follow-on impacts of the disaster -- I consider additional rounds of quantitative easing to be a foregone conclusion. When state and municipal budget shortfalls and unfunded pension liabilities truly exert their pressures upon the domestic U.S. economy, I believe Ben Bernanke will continue to respond the only way he knows how: by firing up his helicopter yet again.
The safest havens
In the final tally, the long-standing reign of the U.S. dollar as the world's dominant reserve currency appears locked in a steady decline. Meanwhile, nations like China with tremendous reserve balances are eager to build their allocations to gold over time, and broad-based retail investment demand across Asia has continued to pressure available global supply (especially with respect to silver). Silver is ultimately tethered to gold, as if by the stretchy cord of a slingshot. These ancient currencies are immune to impairment by debt, and to devaluation through reactive monetary policies. Contrary to Treasury bonds, the anticipated inflationary impact of those monetary policies actually enhances the allure of gold and silver. Should deflation rule the day as some fear possible, then the Fed's proven track record of massive interventions stands as a golden backstop. Critics of gold and silver enjoy teasing the apparent contradiction, but no matter whether Fools seek shelter from inflation or deflation, precious metals offer the rational safe haven.