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XMFSinchiruna (27.47)

Don't Flock to the Wrong Safe Haven

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March 16, 2011 – Comments (14) | RELATED TICKERS: CEF , AUQ , EXK

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.

http://www.fool.com/investing/general/2011/03/16/dont-flock-to-the-wrong-safe-haven.aspx

Excerpts:

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.

14 Comments – Post Your Own

#1) On March 16, 2011 at 6:47 PM, MegaEurope (21.48) wrote:

Contrary to Treasury bonds, the anticipated inflationary impact of those monetary policies actually enhances the allure of gold and silver.

As I've complained before, I think your usage of 'contrary' is grammatically incorrect.

If you're comparing things, they should have a parallel grammatical structure. Gold and silver shouldn't be buried as the object of a preposition that's the object of a verb.

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#2) On March 16, 2011 at 7:30 PM, MegaEurope (21.48) wrote:

Or rather, the preposition 'of' modifying the noun 'allure' that's the object of a verb.

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#3) On March 16, 2011 at 7:30 PM, JakilaTheHun (99.94) wrote:

If you're buying silver and commodities as a "safe haven", you're definitely flocking to the "wrong safe haven."

In the event of a market crash, gold *might* hold up, but silver and other industrial metals are going to get hammered.  You'd be better off buying US treasuries.  Which I'm not recommending, btw.

The best safe-haven in my view:  stocks that pay stable dividends.  REITs will probably be a much better safe haven than silver if we have a market crash in the next two years. WMT, CP, and PG will also probably make out pretty well.  SLW, SLV, and PAAS will almost assuredly get slaughtered. 

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#4) On March 16, 2011 at 7:35 PM, goldminingXpert (29.47) wrote:

Puts are the best safe haven in a disaster. Followed by cash.

Gold did *okay* during the 2008 crash, but silver got reamed, and the GDX went from 55 to 16 in months. 

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#5) On March 16, 2011 at 9:00 PM, XMFSinchiruna (27.47) wrote:

goldminingXpert

That was 2008. The world did not yet understand what was occuring with gold and silver. They wil start down with othger asset classes in the initial sell-off, and then the break-out will begin.

MegaEurope

Agreed in that instance. That's an awkward sentence.

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#6) On March 16, 2011 at 9:46 PM, XMFSinchiruna (27.47) wrote:

And yes, I also think some cash is always a good idea in uncertain times. I have been targeting 15% cash for myself.

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#7) On March 16, 2011 at 10:23 PM, ikkyu2 (99.32) wrote:

You could say 'in contradistinction to Treasury bonds' if you wanted to be excruciatingly correct.  Of course, now you have used a word that 90% of your readers have never seen.

How low do you think gold will go, Sinchy?  What's your entry point? 

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#8) On March 16, 2011 at 10:30 PM, memoandstitch (< 20) wrote:

Perhaps, the $600 billion lost in Nikkei is flowing into US treasury?

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#9) On March 16, 2011 at 10:47 PM, fewl10 (< 20) wrote:

"Puts are the best safe haven in a disaster."

As in put options?  Did someone with a 98% rating really just write that?

Your entire rating must be based on piggybacking other picks.  That might be the dumbest thing I've seen posted on CAPS, including Alstry's posts.

Put options are nothing short of GAMBLING. 

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#10) On March 16, 2011 at 10:47 PM, fewl10 (< 20) wrote:

"Puts are the best safe haven in a disaster."

As in put options?  Did someone with a 98% rating really just write that?

Your entire rating must be based on piggybacking other picks.  That might be the dumbest thing I've seen posted on CAPS, including Alstry's posts.

Put options are nothing short of GAMBLING. 

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#11) On March 16, 2011 at 10:59 PM, goldminingXpert (29.47) wrote:

long-dated puts on the SPX or Nasdaq are about the best bet out there to protect your money during a disaster. I'm talking a fast-moving thing, such as what is going on in Japan or if sudden war should break out in the Middle East.

Puts/bear bets were the best performing asset class during the 08 financial wreck as well. 

Lots of people buy puts as insurance. Not sure why you are so shocked to see them mentioned. They certainly are *not* gambling when used responsibly and in small amounts. 

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#12) On March 17, 2011 at 10:14 AM, XMFSinchiruna (27.47) wrote:

ikkyu2

contradistinction...thanks for the addition of a new word to my arsenal. I like it.

I have no entry point, being that I am already 80% long pms. In a worst case scenario for gold, and as I have repeatedly said I am not saying this is likely by any stretch of the imagination, $1,150 is a brick floor beneath gold prices from here forward. However, anyone trying to time entry into gold by waiting for such a retracement are extremely likely to remain unprotected by gold through the key phases of this onging global economic crisis.

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#13) On March 17, 2011 at 12:09 PM, kdakota630 (29.58) wrote:

TMFSinchiruna

Thanks for pretty much answering my question before I asked it.  LOL!  I was going to ask if you were accumulating cash waiting for some type of pullback or just buying at somewhat regular intervals.

Currently I don't have enough cash to make a worthwhile purchase, but my gut tells me that by the time I do we'll be in (or close to) a pullback.

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#14) On March 23, 2011 at 2:52 AM, ikkyu2 (99.32) wrote:

Thanks for your answer!  I am about 5% in a PM-mining actively managed sector fund; I am certainly beginning to feel like that's not enough.  I always value your pointers on where the value in the sector is hiding.

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