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Three Reasons You Must Replace Some of Your Bonds with Gold and Silver

AUG 24, 2016

I listened to a local financial radio show a few weeks back, where the hosts extolled the virtues of bonds, particularly US treasuries. The advisors are very mainstream, so they saw no use for gold.
One of my first thoughts was, “Wow, investors who follow this advice will get hurt!”
Some of you have asked me what you can say to your family and friends about gold, to convince them to buy. Well, here’s something you can give them… a letter that factually compares treasuries and gold. It shows why it is crucial they diversify into gold now. I encourage you to pass it along to them…
Dear Treasury Bond Holder,
In this uncertain and confusing investment environment, it’s easy to retreat into the safety of treasury bonds. Especially if you own a lot of stocks.
However, that safety is not only waning, the growing bubble in government bonds leaves them vulnerable to a major repricing that could see them fall dramatically. Gold, on the other hand, represents the opposite scenario; it is the ultimate hedge against risk, and its price is poised to soar.
There’s a time and place for everything. Treasuries used to be safe and profitable, but those historical realities are no longer the case. Now it’s time to supplement your bond holdings with physical gold and silver, what offers greater safety at this point in history and much more profit potential than any government investment vehicle can offer.
I’d like to offer you three reasons why those who use only treasuries and no gold as their safe haven investments will see their portfolios suffer… 

#1: Historical Low Yields—and Going Lower

If you were dropped to earth for the first time ever, how would you objectively view the current 10-year government bond yield environment? 

US: 1.36% on July 5, the lowest level in American history
Great Britain: 0.60% three weeks ago, a 322-year low
Japan: -0.09%, record low
Germany: -0.10%, record low
Italy: 1.1%, record low
Switzerland: -0.57%

This would obviously be concerning and puzzling. You’d be forced to acknowledge that…

Current government bonds are terrible money-making investments.

One of the main objections to gold is that is pays no interest. That’s true, but consider what you’d earn from a 30-year treasury bond: the total interest on a $10,000 investment at current yields would return you a whopping $9,840.04. That’s not even a double on your investment after three decades.

And after inflation, what will that buy? After all, that’s why we invest, why we hope to make money, why we want our investments to grow, to use the proceeds to fund our future lifestyle. But by even the most generous calculations…

After inflation, a 30-year bond guarantees a loss in purchasing power. 

The real return on any government issued bond today is negative, even in a low inflationary environment. The days of 20% 15% 10% 5% yields are gone. The current yields offered by government securities largely nullifies the argument that gold pays no interest, especially if you’re an investor in a country with negative bond yields.

And any responsible investor has to consider the possibility of a negative rate bond coming to the US. Look at what’s occurred in just the past three weeks… the Royal Bank of Scotland, the Bank of Ireland, HSBC (Europe’s largest bank), and a small bank in Germany all said they will charge business and/or customers with large balances to hold their cash.

Gold, on the other hand, is at the beginning of another bull market. Purchasing gold now is “buying low,” while continually allocating all your “safe” money into bonds is “buying high.”

Further, gold is on the cusp of a supply deficit that will worsen over the next few years, is being increasingly sought by institutional investors, and will gain purchasing power during both deflation and inflation.

In other words, gold is much more likely to rise at this point in history than fall. In the kind of environment that’s almost certainly ahead, gold will be not just a safe haven but hand us a substantial profit.

And as horrible as current yields are, they’re virtually guaranteed to go lower still…

Interest rates are low, of course, because governments are fiercely trying to stimulate their economies. Since the financial crisis in 2008, central bankers around the world have cut rates over 650 times!

They think the economy will grow if consumers can borrow money for next to nothing. It isn’t working. America, Europe, Japan, and others are growing at the slowest pace in decades. But instead of recognizing the dead horse can’t be beat any further, central bankers double down on their inventions and manipulations. So this trend is certain to continue, which means yields will not only remain low but fall further.

This leads to the second reason why investors should replace some of their government bonds with some gold and silver… 

#2: The Greatest Bubble in Modern History

It just isn’t that you can’t make any real money in US bonds today, but now government bonds have become increasingly risky.

Another argument for Treasuries is that they’re safe. That used to be true, but now that safety is evaporating due to their surge in demand. Why?

“I’m worried I'm buying a bubble,” admits Tim Anderson of MND Partners. Elliott Management's Paul Singer says this is “the biggest bond bubble in world history.” After a 35-year bull market in bonds, it’s clear they’ve reached bubble territory.

Bond guru Bill Gross of Janus Capital thinks the surge in negative yielding bonds around the world will have dire consequences:

“Global yields at lowest in 500 years of recorded history. $10 trillion of negative rate bonds. This is a supernova that will explode one day.”

The World Gold Council is more gentlemanly about it…

“Bonds generally help balance the risks inherent in portfolios. Low yields, however, not only promote risk taking, but also limit the ability of bonds to cushion pullbacks in stocks and other risk assets in investment portfolios.”

We already have historical precedence that bonds do not “cushion pullbacks in stocks”… in the stock market crash of 2008, a 60% stock/40% bond portfolio lost 41%. Bonds did not hedge the traditional portfolio against stock market selloffs. Gold, on the other hand, despite initially falling largely due to liquidity needs, ended the year 5.5% higher.

By the way, the “reach for yield” largely explains why stocks have rallied, too, despite poor fundamentals. By most any measure, stocks are expensive, earnings are poor, and the global economy can’t get a grip. Stocks would normally be down in this environment—but instead the S&P is at all-time highs.

The upshot is that this low yield environment has introduced higher risk in bond (and equity) holdings…

The surge in demand for bonds has pushed prices and valuations into bubble territory. Bubbles never last. Sooner or later, a crash is inevitable.

If you’re a bond holder, the level of protection they offer your portfolio is markedly less than it has been historically. Most advisors will say Treasuries are the clear choice if your top concern is safety—but that’s simply not the case today. And when the bond bubble pops—whether it’s this year or next year or in three years—it unfortunately will hurt every stubborn investor that desperately clings to an old paradigm.

Despite what you may think about gold, it is a 3,000-year safe haven that has zero default risk, is just as liquid as a bond, and will be a natural landing spot for beat-up bond and equity investors. And if held privately in physical form, it has no counterparty risk.

The reality is that physical gold is a lower risk asset than a manmade product from a faceless political entity.

Which leads to our third reason… 

#3: Loss of Confidence in Central Bankers

It’s not just that you can’t make money in bonds and that they carry higher risk, but they’re also susceptible to the greatest risk of all: loss of faith.

This risk is not theoretical. Pretend again that you’re dropped to earth for the first time and see…

$12.3 trillion of money printing (and counting)
Lowest interest rates in 500 years (and headed lower)
$10 trillion in negative-yielding global bonds (and growing)
654 interest rate cuts since the collapse of Lehman Brothers in 2008 (and counting)

… and yet global growth is 1-2%, inflation is stuck well below the Fed’s target, and debt is snowballing? As the robot on Lost in Space said: does not compute.

Here’s a recent example of where confidence in bonds is already waning… Japan had a very weak two-year note auction last month, where the gap between the lowest and average price was an unusually wide. Analysts said this indicates “limited demand.” As the World Gold Council concluded…  

“We believe that the weak JGB auction and ensuing sell-off in global sovereign bonds this week suggests that investors may be losing confidence in government securities.”

Bloomberg agrees:

“The latest credit rally, however, is not a sign of optimism. It's a sign of resignation. Investors increasingly believe central banks will keep rates low for a long time and even purchase more bonds, including those of corporations, to keep markets from falling apart.”

Look, we’ve had ZIRP (Zero Interest Rate Policy), and now NIRP (Negative Interest Rate Policy). Those haven’t worked, so next up will likely be “HIRP” (Helicopter Interest Rate Policy). If we go down the QE road again—helicopter money would be QE on steroids—gold will soar in value and bonds will fall in value.

We live in such a highly politicized world, with a system that allows money to be created out of thin air, that the ludicrous policy of helicopter money is actually being discussed as an acceptable form of monetary policy. I keep saying this to myself.

The thing is, other than HIRP, many on Wall Street already recognize that central bankers are pretty much out of ammunition to right the economic, monetary, and fiscal ship. Once this doubt hits Main Street, the natural result will be a loss of faith in government paper. And keep in mind that the bond market is roughly twice the size of the stock market, excluding derivatives. The exodus could get ugly.

In the monetary crisis our governments continue to barrel us toward, gold will be the last asset standing. In fact…

History shows that gold has been part of every major financial reset, since at least the Roman times. It will be no different this time.

Take away the safety and yield on Treasuries and what do you have left? An I.O.U. from a central banker.

Here’s how the three reasons stack up:

Lowest yields in history—and likely to fall further
At the beginning of a new bull market
No real return after inflation
Gains purchasing power in both inflation and deflation
In a bubble, and once it pops bonds will lose massive value
Has never been defaulted on or gone to zero
Declining ability to cushion pullbacks in market panics
Is one of history’s most crisis-proof hedges
Investors likely to sell in the next crash
Will be a natural target for fleeing bond and equity investors
Carries counterparty risk of US government
No counterparty risk if held privately in physical form
Investor confidence in Fed is falling
Demand rising sharply; institutional investors are increasingly buying
Helicopter money will devalue all Treasuries
Helicopter money will make gold more attractive

The bottom line is this: if you’ve grown weary of lackluster stock market returns and pitiful bond payouts, and more importantly worry about the level of risk embedded in the monetary and fiscal system, I encourage you to replace some of your government bonds with physical gold and silver. In a world of elevated risks on multiple fronts, gold will offer you lower risk, greater safety, and bigger upside than any government security available in today’s marketplace.

It’s time to diversify. It’s crucial to diversify. The wise thing to do in the current environment is to swap out some of your Treasuries for physical gold and silver.


Jeff Clark