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August 09, 2010 – Comments (10) | RELATED TICKERS: GLD , SLV

MegaEurope, and possibly MegaAsia, really nailed me on my last post. How embarrassing! Well, he's (she's; they're) probably right about shorting Treasuries being the way to play the ridiculously low Treasury yield opportunity. Here's the reason to buy precious metals:

The U.S. federal government's debt is ballooning every year. Neither Republicans nor Democrats have the political will nor the mandate to cut spending. The only way to service the debt will be to print money to pour into it, because more and more Treasury buyers will stop buying them (watch China and OPEC, not to mention fewer workers paying Social Security taxes, which is the primary source of buying for UST's). That means debt monetizing by the Fed. 

Given the inflation inherent in such an event, and the economic trouble of the next few years, stagflation is a good bet. Gold is the stagflation investment, while bonds and stocks are falling, but perhaps not falling enough to outpace inflation by shorting them. Gold and silver both hanily outperformed all other investments, and outpaced inflation, while the term “stagflation” was being coined in the 1970’s. 

Disclaimer: yes, I own gold, but if you think that’s why I’m saying this, you don’t understand my investment mindset at all. If you all ignore me, and JPM manipulation drives gold down 50% over the rest of 2010, I’ll be overjoyed to buy more at those prices. The reason I’m telling you all this is primarily for bragging rights, and secondarily so that my CAPS brethren will be better prepared for the future than the great mass of Americans blindly going about their careless lives. 

10 Comments – Post Your Own

#1) On August 09, 2010 at 8:14 PM, rd80 (98.55) wrote:

Social Security taxes, which is the primary source of buying for UST's

Not any more.

"The projected point at which tax revenues will fall below program costs comes in 2010.  Tax revenues will again exceed program costs in 2012 through 2014 before permanently falling below program costs in 2015 -- one year sooner than the estimate in last year’s report"

According to the linked government report, Social Security will effectively be a net seller of bonds this year.

 

 

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#2) On August 09, 2010 at 10:36 PM, ChrisGraley (30.21) wrote:

I'm not really gonna play the treasury  game. Too many variables! 

Did they take into account the younger boomers that were laid off and just decided to retire?

Will Social Security still be a net seller if the economy is still a mess?

What will China do with their treasuries next year? 

Can Japan afford to hold on to treasuries while trying to prop their own economy?

Will we be issuing more t-bills next year or less?

What will mortgage interest rates be next year?

Way too many variables for me to even think about thinking about it. 

 

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#3) On August 10, 2010 at 12:05 AM, MegaEurope (22.50) wrote:

Yes, I agree that the inflationary rationale is significantly stronger than the interest rate rationale.

If gold was not way above its historical average price (adjusted for inflation) I think it would be a good inflation hedge. But it is way above that price, and I don't know how to value it.  I agree Chinese and Indian demand is a signficant shift and worth something, but how much?

So contrary to Chris, gold has too many variables for me and I think treasuries are way easier. It is impossible for yields to go much lower, there is no need to overthink it.

 

-Megaeurope/Megaasia/Megaamericas/etc. (not to confuse people in blogs, I just like to make a lot of picks.)

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#4) On August 10, 2010 at 12:34 AM, ChrisGraley (30.21) wrote:

Wow! Mega is the bizzaro me!

Be careful with historical data with precious metals.They've never really been an indicator, but they have been a vindicator over and over again. 

Forget gold and buy silver. Silver hasn't been near the values that it should be since the 80's.

Mega, you are surely right, t-bills only have one way to go, but the question is when they will start trying to get there.

I commend you if you have the t-bill market figured out. I've thought about it a lot and the more I think , the more I know to stay away.

Maybe I should buy a few T-bills and you should buy a little silver and  we both learn what we should not fear.

Other than clowns, everybody should be afraid of clowns. 

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#5) On August 10, 2010 at 1:01 AM, MegaEurope (22.50) wrote:

No, I'm not saying you should buy t-bills!  Quite the opposite, in real life I am short the ETF 'TMF'.  I agree with you, they might go up or down in the short term but in the long term they have 'one way to go'.

I am familiar with the arguments and not convinced to buy gold or silver, but I'll probably pick up some shares of TGB sometime soon.

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#6) On August 10, 2010 at 1:20 AM, Valyooo (99.60) wrote:

Be careful with TGB, it is a very manipulated stock.

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#7) On August 10, 2010 at 1:23 PM, TDRH (99.75) wrote:

RD80 hit the nail on the head for the turning point for Treasuries, Social Security as a seller of Treasuries six years ahead of forecast.  Some type of fiscal responsiblility needs to be taken just to avoid a flight from treasuries.  It probably would have been earlier if it had not been for all the illegal workers paying into the system, but not taking money out.

The question is, where will the money flow?  Gold is the normal channel, but some other vehicle will need to be attractive.

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#8) On August 10, 2010 at 3:16 PM, FleaBagger (29.19) wrote:

Thanks, rd80 - I never get tired of getting nailed in my blogs. Let's all sell some treasuries, buy some gold and silver, maybe buy JAG today (it's down 22%), and let's all flip the US debt the bird!

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#9) On August 10, 2010 at 6:59 PM, russiangambit (29.47) wrote:

Sorry, I can't figure out why you think the price of gold nd treasuries are linked. Gold is linked to the price of dollar, not treasuries. If you expect dollar to go down, which it probably will long term due to general stagnation in the US economy, then buy gold. though dollar is due for a bounce short term. Price of treasuries is more linked to their supply nd interest rates ( but these re not going to move for  year at least).

In short, dollar and treasuries don't always move in sync.

China and OPEC will not stop buying treasuries, it is not a choice for them, they have to recycle their dollars one way or the other.

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#10) On August 10, 2010 at 11:48 PM, MegaEurope (22.50) wrote:

...that was the point of fb's post, russiangambit.  Everyone in this post agrees that gold is more linked to the dollar than to treasuries.

I would not short treasuries if there was not a 3x ETF created for idiots to go long on them.  In my opinion, the volatility decay will make this otherwise marginal/boring trade good.

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