{"id":69989,"date":"2015-03-23T16:01:40","date_gmt":"2015-03-23T20:01:40","guid":{"rendered":"http:\/\/countingpips.com\/?p=69989"},"modified":"2015-03-23T19:34:44","modified_gmt":"2015-03-23T23:34:44","slug":"global-currencies-teeter-as-bonds-offer-return-free-risk","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/03\/global-currencies-teeter-as-bonds-offer-return-free-risk\/","title":{"rendered":"Global Currencies Teeter as Bonds Offer \u201cReturn-Free Risk\u201d"},"content":{"rendered":"
March 23, 2015<\/div>
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By\u00a0Stefan Gleason<\/strong><\/p>\n

Never before has holding bonds denominated in national currencies been more risky and less rewarding.\u00a0 That may seem like a provocative statement, but it\u2019s not hyperbole.\u00a0 It\u2019s the reality investors around the world now face.\"Teetering\"<\/p>\n

Sovereign debt issued by Western governments sport record-low yields \u2013 in some cases,\u00a0negative<\/em>\u00a0yields!\u00a0 Earlier this year the yield on the U.S. 30-year Treasury dipped to an all-time low of 2.25%.\u00a0 Meanwhile, despite talk of rate hikes to come, the Federal Reserve continues to keep short-term rates near zero.<\/p>\n

The Fed has taken unprecedented steps to make holding dollars unappealing with the goal of stimulating consumer and business spending. But other central banks, including the European Central Bank, have managed to\u00a0undercut the Fed<\/a>\u00a0by pushing their own lending rates\u00a0below<\/em>\u00a0zero.\u00a0European bonds are being issued at rates so low as to make U.S. debt instruments look comparatively attractive.<\/p>\n

And bond buyers are taking on ever increasing levels of risk to just try to get half-decent yields.\u00a0 Bondholders are going out further and further in duration, locking in fixed yields for even longer than 30 years.<\/p>\n

Global sales of bonds that won\u2019t mature for more than<\/em>\u00a030 years have soared to $69 billion year to date, according to the Financial Times<\/em>, a 12% increase from the same period last year.\u00a0 The United Kingdom recently introduced a 53-year bond after Spain and Canada, and a handful of corporations, began selling 50-year bonds of their own. \u00a0If 50 years isn\u2019t a long enough time for you to wait to get paid back, you might find new 100-year peso bonds issued by Mexico to your liking!\"Nestle<\/p>

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Needless to say, the currencies in which some of these ultra-long-term bonds are denominated could become worthless by the time they are due to mature.\u00a0 Anyone who thinks he can predict currency exchange rates, inflation rates, interest rates, or default risk over the next 100 years, 50 years, or even 30 years, is deluding himself.\u00a0 Yet bond buyers seem eager to speculate that their pittance yields will remain viable in the unknown economic environments and market conditions ahead.<\/p>\n

Buyers of gold and silver<\/a> don\u2019t need to speculate about whether their precious metals will be viable decades from now.\u00a0 Physical gold and silver aren\u2019t anyone\u2019s liability, can\u2019t default, and retain intrinsic, universally recognized value that transcends all fiat currencies.<\/p>\n

One of the knocks on precious metals is the notion that they have no yield. Of course, measured in fiat currencies, metals owners\u2019 principal has generally risen\u2026 but the \u201cno yield\u201d argument doesn\u2019t even pass the smell test when government bonds don\u2019t have yield either.<\/p>\n

We fully admit that we can\u2019t predict what gold and silver prices in terms of U.S. dollars will be decades from now.\u00a0 In a sense, the nominal price is irrelevant.\u00a0 What matters \u2013 and what has been proven through hundreds of years of monetary history \u2013 is that gold and silver retain purchasing power.\"Gold<\/p>\n

Dollars, over time, lose purchasing power.\u00a0 In his annual letter this year to Berkshire Hathaway shareholders, Warren Buffett noted, \u201cDuring the 1964-2014 period\u2026 the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes $1 to buy what could be bought for 13\u00a2 in 1965 (as measured by the Consumer Price Index).\u201d<\/p>\n

Buffett warned against treating \u201ccash-equivalent holdings\u201d and \u201ccurrency-denominated instruments\u201d as risk-free assets.\u00a0 Holding them over long periods is quite risky.\u00a0 If the dollar loses another 87% of its purchasing power in the next 50 years, then holders of cash and fixed-rate, low-yield bonds will experience significant real losses.\u00a0 There\u2019s also a risk that the dollar\u2019s value will decline more rapidly in the future than it has in the past.<\/p>\n

Don\u2019t be fooled by the recent \u201cstrength\u201d in the dollar versus other unbacked foreign currencies.\u00a0 Yes, it does look impressive on the chart.\u00a0 The Dollar Index has spiked all the way back up to 100 \u2013 a level last seen at the beginning of 2003.\u00a0 But the dollar\u2019s purchasing power has not recovered to 2003 levels \u2013\u00a0not even close.<\/em><\/p>\n

In 2003, you could buy an ounce of gold for just $345 spot.\u00a0 Silver traded for a mere $4.75 an ounce.\u00a0 Clearly, the dollar\u2019s purchasing power has weakened substantially in the 12 years since. Precious metals have retained theirs, despite succumbing to downdrafts of late.\"US<\/p>\n

A rising Dollar Index makes it tough for metals prices to advance in terms of dollars.\u00a0 (Gold and silver are showing strength in terms of euros and have skyrocketed in terms of Russian rubles and Ukrainian hryvnia.) \u00a0At some point, though, the dollar will slip. \u00a0It cannot maintain its current rate of ascent in perpetuity.<\/p>\n

Looking at the USD chart, a 26-week Relative Strength Index (RSI) momentum gauge shows that the up-move since mid 2014 is registering a more extreme RSI reading than any of previous moves over the past 20 years.\u00a0\u00a0 What we have is a spike \u2013 not necessarily a long-term trend in the making.\u00a0 Spikes can reverse just as dramatically in the opposite direction.<\/p>\n

Regardless of how the dollar fares versus the euro or other currencies in the near term, the dollar stands to resume the long-term trend identified by Warren Buffett.\u00a0 The dollar, over time, is destined to depreciate against real assets, including gold and silver.<\/p>\n

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\"Stefan\u00a0Stefan Gleason is President of Money Metals Exchange<\/a>, the national precious metals company named 2015 \u201cDealer of the Year\u201d in the United States by an independent global ratings group<\/a>. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.<\/p>\n

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By\u00a0Stefan Gleason Never before has holding bonds denominated in national currencies been more risky and less rewarding.\u00a0 That may seem like a provocative statement, but it\u2019s not hyperbole.\u00a0 It\u2019s the reality investors around the world now face. Sovereign debt issued by Western governments sport record-low yields \u2013 in some cases,\u00a0negative\u00a0yields!\u00a0 Earlier this year the yield […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-69989","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/69989","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=69989"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/69989\/revisions"}],"predecessor-version":[{"id":69996,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/69989\/revisions\/69996"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=69989"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=69989"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=69989"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}