Treasuries are the new gold

We’ve talked a lot about how US Treasuries have arguably become a *type* of Giffen, Veblen, choke-price resistant good/asset (pick one) since about mid-August this year.

A date which happens to coincide with the return of over-riding deflation fears, as well as a pause in gold’s stellar price rise, and a major pick-up in demand for Treasuries:

Not to mention a big liquidation in the SPDR Gold Trust’s holdings:

What prompts this set of (un)fortunate coincidences?

Well, given we’ve also seen a major fall in the gold lease price (irrespective of increased vaulting costs), we would say it possibly represents the month that holding gold became less desirable than holding US Treasuries.

Or, the moment that the gold market became so saturated with gold, that the yellow metal reached its effective choke price, shifting the demand curve leading to the loss of gold’s long-held title as the ultimate form of collateral (replaced by US Treasuries and other high quality government bonds instead).

Which begs the question: Why now?

The answer is possibly because US Treasury securities (and other high-quality debt) became zero-yielding, meaning these sorts of bonds began to rank pari passu with gold as a store of value.

Until the zero-hour moment, US government debt securities were only seen as preferable due to the additional risk-free returns they could generate compared to gold. But given that gold yields were always the lowest in the market, from a risk-free perspective, gold remained viewed as the safest store of value. (The safer the security the lower the yield.)

After zero-hour, however — since both Treasuries and gold now rank pari passu in terms of yields — other qualities and factors have come into play in terms of preferences. Namely costs and risks.

For example, because gold carries a vaulting charge as well as *possible* government intervention risk (confiscation, for example) it might actually become less desirable to hold than a Treasury security. That’s despite preferences being aligned from a yield perspective.

Of course, from a central bank’s point of view, it’s hugely important that, if and when a battle of preferences does begin to impact paper-money and gold, it is paper-money that wins the day. That ultimately investors flock to Treasuries rather than gold, because the opposite could possibly undermine the US fiat-based monetary system.

If gold investors didn’t switch preferences towards Treasuries at zero-hour, the implications for the world’s key reserve currency might be catastrophic.

What it also means is that there’s currently a huge incentive for the government and central banks to make holding gold as painful, costly and problematic as possible. And, most importantly, that the cost of holding gold remains above and beyond that of holding cash (one other reason why negative interest rates, or a charge/tax on money is risky.)

Luckily in the battle of preferences, it’s Treasuries that are winning the day so far. (Not that that doesn’t create a whole new bunch of problems.)

But, as Dylan Grice at Societe Generale has noted, there is no such thing as a free lunch in the land of gold and central bank intervention.

Related links:
Why gold forward rate inversion is important
– FT Alphaville
Cash for gold, financial market edition
- FT AlphavilleCash is king – FT Alphaville
The Swiss franc is as good as gold (literally)
- FT Alphaville

Copyright The Financial Times Limited 2019. All rights reserved. You may share using our article tools. Please don't cut articles from and redistribute by email or post to the web.

Read next:

Read next:

FT Alpha Tweets