I was scanning the recent global financial events. While it did not surprise me, I was startled when I read the news about the latest bond sale in Europe.
No, I am not speaking about un-sustainable high bond yields in Greece, Spain or Italy. I am concerned about them, but I am speaking about a negative-0.35 percent yield on German treasury bills. While this may sound very strange to you dear reader, it is not the first time Treasurys or bonds in Europe have traded with negative yield.
Last month, the 2-year German bonds traded with negative yields. France also has issued short term bonds which yielded negative returns. A few weeks ago, Denmark issued bonds that will yield negative rates.
I am astounded when I read that people are flocking to investments where you are guaranteed to lose money, not matter what. So the best outcome for your investment dollar is that you will lose some. If yield being zero or negative is the criteria for determining the destination of your investment under the guise of safety, I am not sure how one can ignore the argument of gold being the investment destination for those same dollars.
The long-standing argument by the detractors of gold has been that it does not yield any tangible regular returns. Some go as far as stating that gold cannot be considered as an Investment because it does not have a stated yield. And yet those same geniuses determine negative yield as legitimate investment destinations.
I give up!
Yet, gold has surged for most of the past five years.
The U.S. Treasury 10-year note has a 1.50 percent yield. And when you take out the fees and pound of flesh that the trader will take out to pay for his home in the Hamptons, you are not quite at zero but getting closer to going low enough to be considered negative. This is for the 10-Year bonds. When we see the yields on the shorter maturities and deduct the broker fees, we do see negative yields in the U.S. as well.
To make matters worse, we are going to see an auction of $32 billion of new Treasurys here in the U.S. to get the yields to rise a bit. Guess who is the largest buyer of U.S. debt?
If you said “the Federal Reserve,” then give yourself a pat on the back. Last year the Fed Reserve bought 61 percent of Treasurys issued to finance debt.
I do not believe that this year would have been much different. In fact I believe this year the Fed’s may have actually bought more than 61 percent of the debt issuance.
That’s just not right folks… the Central Bank should not
be participating in auctions by 61 percent... or 50 percent... or even 25 percent. This incestuous relationship has to stop before we lose any sense of proper behavior in the financial markets.
With the stock markets in a tizzy and debt ballooning out of control, it is only a matter of time before QE3 is announced and that will light a fire under gold prices.
I will be buying more gold soon and given that it fell by another $15 recently, it may be sooner rather than later.
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