Why Gold Will Replace U.S. Treasuries as the World's Last Risk-Free Investment

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It wasn't long ago that U.S. Treasuries were considered a "risk-free" investment. But the financial crisis, hulking budget deficits, political gridlock, and the Standard & Poor's debt downgrade have changed that perception – forever .

Now there's only one safe -haven investment: gold.

Since surging to a record high $1,917.90 an ounce earlier this month, the price of gold has slipped on profit taking. But don't let that minor correction fool you into thinking gold's bull run is over. The yellow metal's best days are still ahead.

How do I know? Because, unlike U.S. debt, gold can't be downgraded. It has inherent value that's more reliable than the word of even the most powerful country on earth.

Gold was used as currency for centuries. In fact, it's still being used for transactions in places such as China, India, and much of the Middle East – regions that are eager to diversify away from the beleaguered U.S. dollar.

But now gold's also usurping the role U.S. Treasuries have played for the better part of a century – that of the ultimate investment safe haven.

Just take a look.

The World's Real Risk-Free Investment

From July 21, 2009 to mid-July of this year, the correlation between Treasuries (as represented by the iShares 20-Year Treasury Bond ETF (NYSE: TLT)) and gold (as represented by the SPDR Gold Trust ETF (NYSE: GLD)) was 0.5 – meaning that only half the movement of one coincided with the other.

However, in the period ranging from July 21, 2011 to Aug. 16, 2011, the correlation jumped by 78% to 0.89. That means gold and 20-year Treasuries are moving in near- perfect lock step.

What's the catalyst for this shift? I believe traders are using gold to hedge their holdings against the systemic solvency risk of a global banking failure. Simply put, they're looking to cover their bets should the worst happen.

Far fetched? Not really.

If the banking system crashes, it will take the developed world's financial system down with it. And when that happens, it's very likely that cash withdrawals or cash transfers will be frozen, as will the credit markets.

risk-free investment
Thus, gold may be one of the few assets that's still actively traded, meaning there's still an independent pricing mechanism in place.

You will, for example, be able to price gold at the local pawnshop – just as easily as you'll be able to cut a deal on the corner of the street (though hopefully not at gunpoint).

At an institutional level, this is already happening, albeit with a slightly different twist.

ICE Clear Europe Ltd. – a unit of Intercontinental Exchange Inc. (NYSE: ICE) and one of Europe's top derivatives- clearing companies – is accepting gold as trading collateral. Earlier this year, JPMorgan Chase & Co. (NYSE: JPM) and the Chicago Mercantile Exchange (CME) also started accepting gold as trading collateral.

The advantage gold offers is incontrovertible . Bonds – be they U.S. T reasuries or other types of securities – are limited by their sovereign backers. That means they are only as solid as the country that's backing them.

But that's not true of the yellow metal.

The lesson here is clear: You can't downgrade gold; and that makes it the world's only risk-free investment.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. John Ciulla | August 30, 2011

    When all else fails gold will shine it's brightest but let's not disregard silver, also a monetary and industrial metal as well. Silver has actually outperformed gold on a percentage bases and has been moving toward it's historical ratio of 16:1 with gold. If it were there today silver would be around $125.00. It's currently around 43:1 down from over 60:1 a few years ago. It's not there yet but certainly heading in that direction.
    Now with the devaluation of currencies in every country under the burden of their own sovereign debt and with the many threats and uncertainty that encumbers our modern world, precious metals and other real assets will certainly gain in value.
    As you say, Gold can not be downgraded due to it's inherent value that has been proven throughout history to be much more reliable then the word of even the most powerful country on earth.
    As this crise continues to develop more "money" will flow into gold and silver sending prices to levels never seen before in human history. This is only the beginning so start converting your worthless dollars and any dollar denominated "assets" into gold and silver before the crowd rushes in. Then it will be time to sell.
    Learn how to produce, provide and preserve wealth while acquiring precious metals at true dealer cost at: http://www.BestPriceOnSilverGold.com

  2. kishore | August 30, 2011

    good sir this message will be use for me in feature, trade in gold

  3. McGillycuddy | August 30, 2011

    Congratulations, Mr Fitz-Gerald upon an excellent article. I have a slightly different angle amounting to much the same scene. The value of gold, bricks, land, oil cannot change. I'd like to see you lean more heavily on the 1923 German fiasco and the more recent Zimbabwean situation. In looking at price movements, people simply do not appreciate that they are having to put more money on the table to buy the same thing. If you'll pardon the pun, there is only a tiny minority with whom the penny has dropped.
    I guess that you have Irish ancestry. Please buy something Irish like a 200g. block of DUBLINER cheese or some Kerrygold butter for your household. You'll be helping Ireland towards a BETTER CREDIT RATING than Portugal and Cyprus.
    By the way there's an incvestment that doesn't rate too badly until the 'system' collapses – Undated British Government stocks like War Loan and Consols.
    Best wishes to all at Money Morning Newsletter from a reader in the foothills of the Southern Drakensberg mountains.
    McGillycuddy of the Reeks.

  4. Jim Patterson | August 30, 2011

    Thanks for the article on correlation. It gave me another way to think about it. I think all of us living in the U.S. need to be thinking about our own personal reserve currency.

    Jim

  5. fallingman | August 30, 2011

    Uh huh.

  6. OldDog | August 30, 2011

    Gentlemen,

    As I understand this article and hundreds like it, the upward price of gold and silver to unheard of value is dependent on the demise of the dollar to a total collapse. The advise then of nearly every one is to then sell our metal, and reap huge gains, but my question all along has been and remains, just what are we going to receive for our gold and silver when there is no currency in America? Who can say with proof that there will be Euros or Swiss franks available to trade with in America, or if in fact, they too have bit the dust?

    • Chris Mc | August 31, 2011

      Gold is already replacing U-S Treasurys as the safe haven, and across the globe it is competing with or replacing dollar bills as the prime currency. In other words, precious metals will be THE money. There will be consequences for those who do not hold PMs, or other tangibles of value, just as there are consequences of inflation-theft for those who hold printed and digital money today. Asia is betting on that. It would be safe to convert your metal to paper as long as paper still held public confidence. The question would be, which day would you wake to find that confidence has ended? Would it be the day after you converted metal to paper?

    • Shamus | September 1, 2011

      OldDog,

      I too thought the same thing, however there MUST be SOME value in the dollar, locally if at all. Wherewith local U.S. citizens will trade amongst another. I would think even the most terrible crash would reduce to dollar to mere peso value. At this time, a great many peso-dollars would be returned for silver, but would also require many of those dollars to reign in a loaf of bread. At least your dollar-value would remain as what it is today if stored in a precious metal. The mind set being that one does not actually get richer, but one still can purchase as many things as they could before the meltdown. Is this a fair depiction?

  7. Larry | August 30, 2011

    If correlation is truly what is meant rather than variance, the movement together is the correlation squared or 25% if the correlation is 0.5 or 80% if the correlation is 0.89. The correlation increase from 0.5 to 0.89 is even more impressive.

  8. ROBERT K. DOYLE | August 30, 2011

    If I GO DOWN TO MCDONALDS AND BUY A BIG MAC W/ MY GOLD…WHAT CHANGE WILL I RCEIVE????

  9. Bread Line | August 31, 2011

    Gold to $3,400 plus.

  10. Michael Horrex | September 4, 2011

    So what's the best way for a small investor to put his money into gold

  11. Michael Horrex | September 4, 2011

    So what's the best way for a small investor to put his money into gold? I guess he'll also need the equivalent of ready cash. Would gold coins be useful or is there a better way?

  12. H Craig Bradley | September 4, 2011

    As you hinted about implied security risks with gold rather humorously. The harsh reality is a financial and banking collapse would have to include civil unrest and disorder, as well. The Federal government would be forced to intervene with troops (or National Guard) to help control our largest cities. Think of it as a national reenactment of Hurricane Katrina in New Orleans. So, you want to be far away from any metropolitian area if this worst case scenario were to occur. Gold does little good if a mob storms your house and loots it, leaving your carcass for the ravens. Remember too, gold is neither fungible or edible.

  13. Craig Bradley | September 4, 2011

    GOLD IS FALSE SECURITY

    As you hinted about implied security risks with gold rather humorously. The harsh reality is a financial and banking collapse would have to include civil unrest and disorder, as well. The Federal government would be forced to intervene with troops (or National Guard) to help control our largest cities. Think of it as a national reenactment of Hurricane Katrina in New Orleans. So, you want to be far away from any metropolitian area if this worst case scenario were to occur. Gold does little good if a mob storms your house and loots it, leaving your carcass for the ravens. Remember too, gold is neither fungible or edible.

  14. CHRISTOPHER MADDOX | September 10, 2011

    The world's politicians will never give up their power to inflate their presige through fiat currency. Gold will be defacto outlawed in any world wide financial collapse.

  15. Xavier | September 11, 2011

    So, my question is:
    As commented here if bank system will collapse and then money will not have any values and economy will be back to the middle age system…why we have to invest money in suggested stocks recommended to subscribers with a grates revenues (as it is) if this money will be nothing when economical collapse came to visit us??? Why to invest in GLD if is not gold is an ETF valued in money??? we have to wait for that moment an in the main time enjoy as much as possible before money will just be a piece of paper??
    Thanks and best regards from Barcelona, Spain (sorry for my english)

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