As Bond Prices Sink, Hold on to Gold


"Holders of a diversified portfolio of precious metal assets will make a fortune. . ."

Since the start of the year 30-year U.S. Treasury bonds have fallen by 10%, the Dow Jones Index 7.5% and real estate continues on its downward track. Gold is up by almost 7%.

The last shoe to drop in financial markets is the biggest of the lot. Bond markets are huge and critically impact on currencies, government borrowing and by implication precious metal prices. At the fundamental level, it is very easy to see why a Saudi investor or Gulf State might today buy gold or silver over U.S. treasury bonds. The tiny yield on treasuries assumes zero inflation at a time when government spending is soaring and all history suggests that this will mean inflation.

If nothing else this has undermined the argument that gold does not pay interest. Moreover, investors can see that governments can inflate the supply of bonds—but not the supply of gold and silver. Perhaps that is why the price of gold and its cheaper cousin, silver, is up since the start of the year. There are some big physical buyers out there, and the price is responding to increased demand and almost fixed supply.

The problem now is that we face systemic financial failure. The central banks have made massive policy errors and more and more investors are beginning to realize the obvious truth: they do not know what they are doing, and will have no more success in solving these problems than they did in avoiding them in the first place.

But when financial systems come crashing down it is gold and silver—the only true money—that you want to be holding. Bonds, shares and real estate are going down in 2009; and don't forget that bonds will, ultimately, take the U.S. dollar down, too.

Holders of a diversified portfolio of precious metal assets will make a fortune as this narrow market becomes the object of incredible demand.

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