Gold, Silver, Treasurys – A Snapshot

Gold & Silver

In December 2008 I called for a bottom in Silver. From then through June it has risen from $10 to almost $16 Dollar per ounce, a 60% gain. Then, on June 7th I advised caution on Silver and recommended to cash in and buy at new lows. Since then it has dropped from near $16 to around $12.50.

Below you can see a summary of my predictions in the chart:

Silver Chart
Click on image to enlarge.

I also said in that post from June 7th that gold should do fine. Gold has remained comparatively stable since then. While silver dropped by about 15%, and the S&P500 by about 6% gold fell by only 4%:

gold-vs-silver-07-10-2009
Click on image to enlarge.

Monetary commodities, such as gold and silver should act well during a deflation. Why? Because during deflation cash is king. And gold is the king of all cash.

The problem with silver is that it acts like a hybrid between a monetary and an industrial commodity. It is hard to discern how many people are invested in it for the wrong reason, namely inflation. (Yes, I am talking to you Peter Schiff :) ) But in cases when it is so obvious, when false inflation fears scream at you, it is pretty easy to figure it out.

Once those are washed out and people are back in reality mode, silver should continue to act well along with gold. Silver may be an attractive addition to portfolios again at this level. But I would advise caution. For the time being gold remains preferable. In fact, gold has outperformed both the market and silver since October 2007.

As far as gold/silver mining stocks are concerend, the ^HUI index continues to hold the line and another upward wave may be due now:

hui-as-of-july-10-20091

Treasurys

Treasury Notes and Bonds are the ultimate deflation investment. Why? Because during deflation cash is king. And Treasury securities are the safest possible claim to cash at interest. Why? Because the government can always (and will) tax and loot the people to the hill to pay off its debts if it needs to.

(Remark: Contrary to what some people tell us, the US government can NOT print money to pay off its debts. True, the Fed can print money to buy NEWLY ISSUED government debt that may or may be used to pay off older debts. But that doesn’t make the debt go away. It merely refinances old debt. It is the exact opposite of printing money to pay off debts which is, for example, what happened in Weimar Germany and in Zimbabwe and precipitated hyperinflation. It is crucial to understand this causality. Again, to those who don’t fully understand this yet, I can only recommend reading my post Inflation & Deflation Revisited.)

Back in November 08 I called for significantly lower Treasury Yields between 2% amd 2.5%. They then fell from 3.09% to just below 2.5% in January 09. I then expected for technical reasons that they will move higher to the upper end of the range which would be around 3.3%. They actually overshot and went as high as 3.99%. I then said that Treasurys are a good call again. Yields have since then fallen to around 3.30%:

10-year-treasury-2009-july-10

Click on image to enlarge.

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.


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