In 1981 at the height the last gold bull market, 30 year government bonds were yielding 14%. This is what the bond market demanded back then. In other words, it took a 14% yield to entice an investor into the 30 year government bond market.
September 1981 30 Year U.S Government Bond Yield 14%! Sorry, I just had to type that again! Imagine being able to get 14% on your money guaranteed by the “safest” issuer? After all, the U.S. government has the ability to tax the U.S. Citizens.
Lets take a look some 28 years later and see how the bond market rewards investors today. Look at the coupon.
| COUPON | MATURITY DATE |
CURRENT PRICE/YIELD |
PRICE/YIELD CHANGE |
TIME | |
| 3-Month | 0.000 | 12/10/2009 | 0.14 / .14 | 0.009 / .009 | 23:00 |
| 6-Month | 0.000 | 03/11/2010 | 0.22 / .22 | -0.005 / -.005 | 23:00 |
| 12-Month | 0.000 | 08/26/2010 | 0.38 / .39 | -0.01 / -.010 | 23:00 |
| 2-Year | 1.000 | 08/31/2011 | 100-04½ / .93 | 0-00 / -.000 | 23:00 |
| 3-Year | 1.375 | 09/15/2012 | 99-20½ / 1.50 | 99-20½ / 1.498 | 23:00 |
| 5-Year | 2.375 | 08/31/2014 | 100-00+ / 2.37 | -0-02 / .013 | 23:00 |
| 7-Year | 3.000 | 08/31/2016 | 99-20+ / 3.06 | 0-00 / .000 | 23:00 |
| 10-Year | 3.625 | 08/15/2019 | 101-09+ / 3.47 | -0-07 / .026 | 23:08 |
| 30-Year | 4.500 | 08/15/2039 | 103-04½ / 4.31 | -0-23½ / .043 | 23:00 |
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As you can see an investor today would only receive 4.5% investing their money in a 30 year government bond. Compared this to 14% some 28 years ago and you begin to see that people living on a fixed income are having a hard time finding the right place to park their money for current income. If you’re comfortable tying your money up at 4.5% until say 2039 that would be a suitable “long-term” investment for you.
First of all we need to understand the interest rate environment rate we are living in. Today’s current yield curve for the bond market is a sign that capital is more concerned about safety and the return of capital versus the return on capital (yield).
With once blue chip companies going out of business and defaulting on their obligations, it is no wonder that people are piling into government bonds. And as probable as it may seem for long term rates to rise, there is no guarantee this will happen any time soon. Why is this? Well, the U.S. bond market is seen as the safe haven for return of capital. Of course, gold is the ultimate safe haven, as no counter party exists. However, we have to understand that the gold market is too small to bank roll the global economy.
This doesn’t mean anything bad for gold. On the contrary gold should do extremely well over the next several years. I am only indicating that the global banking system will turn turn to the US Treasury Market if and when the next shoe of the financial crisis drops.
Here we have the 10 year chart on Gold and as you can see we are at historic all time highs. (Chart compliments of kitco) Gold is breaking out and running up with most investors not aware of what gold is, real money. So, while the bond market yields are bumping around historic lows, gold has been in a stealth bull market since 2001. Here is the “kicker” Not only has gold gone up 8 consecutive years, it has provided the safe haven as there is no counter party risk to physical gold in your hand.
The safety trade is on and this simply means large money is seeking safety/preservation. I don’t have a crystal ball but it is clear that someone somewhere with a lot of money is buying a lot of gold for wealth protection….back to the yield curve.
You will be tempted to seek a higher interest rate return for your money and there WILL be a lot of offers out there. However, I want to caution you to be very selective and doggedly slow and careful with who you entrust your money.
The Yield Curve and Gold is telling us that something is up somewhere. One last thing:
While there is no question it is very hard finding an attractive yield today, it is even harder to replace your money once it is lost to careless investment. Be careful out there and never make an emotional decision when it comes to investing.
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With gold going up so high so fast why are there not concerns that it is just another bubble heading towards a burst.
There are now 8 Gold ETF’s, China is buying more bullion and there is nowhere else that is safe. Once the market begin to turn don’t you think that all this money tied up in gold is going to run with the latest trend?
Bubbles are dangerous when you have a “bubble mentality” IMO, gold is ultimately insurance, not for speculation. If you look at the 10 year chart in gold and/or study the historic Dow/Gold ratio, there is a good argument that we are in the midst of a long term trend. With that said, an investor has to be careful with regard to how high a percentage they invest in any sector. But overall, I always have gold as I always insure my portfolio.