Are U.S Treasuries and Gold in Conflict?


". . .the purchasing power of Gold to the U.S. 10-Year's price is breaking out to a new high."

As observers watch both Gold and Treasuries go higher in price, they're concluding that one of these asset classes must be wrong. I can certainly understand that view. Over the past year, I have written several times that the 27-year bull market in U.S. Treasuries most likely ended in December of 2008. However, a great portion of my skepticism on the prospects for further U.S. Treasury price appreciation arose not only from supply, but, from the collapsed capital flows associated with depression.

My reasoning was as follows: in a world of reduced trade, less dollar reserve building would ensue, thus less sovereign support for U.S. Treasuries. Also, I also reasoned that Americans, now trapped by debt and job losses, would also not be able to support Treasuries through savings. Each of these conditions has come to pass. Trade did collapse. Less dollar reserve building did ensue. The Agency market and the long end of the Treasury curve have largely been abandoned by foreign reserve managers. Equally, in a world of 1.52.0 trillion dollar deficits, the year-to-date savings rate of Americans at 446 billion while an increase over previous years is not enough to support our government spending. Not the last fiscal year, nor the fiscal year to come.

My current view is that Gold and U.S. Treasuries are both partaking of the same surge in liquidity, now washing over most asset classes. Had this been a standard recession, I would have been happy to be bullish on U.S. Treasuries right from the start. If liquidity has indeed now returned as evidenced by asset reflation, then, an opportunity should open up again for the Treasury market to express a macro view.

A change occurring in the above ratio of Gold to the price of the 10-Year Treasury. This chart shows that after a year of crisis, the purchasing power of Gold to the U.S. 10-Year's price is breaking out to a new high.

I suspect the liquidity surge is going to keep pushing assets forward with less regard to a macro view. And while the U.S. Treasury bond market has too many participants to accurately characterize, it seems likely that if the kind of message expressed in the chart persists, a recognition phase could finally unfold about the solution we chose for our collapsed economy.

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