U.S. Treasury Bonds or Gold: Which Are Safer
Posted onU.S. Treasury bonds have long been seen as the gold standard for safety. In times of financial crisis, war and recessions, investors around the globe turned to
the perceived safety of U.S. Treasury debt.
After all, Treasuries are backed by the full faith and credit of the United States federal government.
Simply put, our government has promised to pay back lenders with interest.
Yet times are changing.
Analysts at Bank of America recently raised this question—U.S. Treasury bonds or gold: which are safer—in a research note to clients.
It’s a fair question.
The U.S. national debt is soaring. There is zero focus or political will on debt reduction. The many tax cuts that have been recently proposed are only expected to increase our debt in the years ahead. There is no relief in sight for our federal debt.
So, where do we stand now and what does this mean for investors?
The U.S. national debt currently stands at $35.8 trillion and as a percentage of our gross domestic product is nearly 125%.
What’s more, our nation’s policymakers have been willing to gamble with the full faith and credit of our nation’s word that we will pay back our debt. When people or institutions lend money, they want confidence that they will get their money back.
Investors with long memories will remember the dog days of August 2011. That’s when Congress held the debt ceiling hostage in a full blown fight over raising the debt limit—and our elected officials took our nation to the brink of defaulting on our debt.
What happened then? Gold soared to its then all-time high above $1,900. Global investors turned to gold as a safe haven. Standard & Poor’s downgraded the U.S. credit rating. And, the stock market tanked.
The key thing with debt is that you have to pay it back. Otherwise, people, countries, corporations around the globe who buy Treasury debt aren’t very willing to do it in the future. Or, if they are willing to risk their investment, they will demand higher interest rates to lend their money.
Are we at a watershed moment when investors are realizing that gold is safer that U.S. Treasury debt? Could be.
Gold broke through the $2,700 an ounce barrier for the first time ever recently. The number of firms that now project gold gains to $3,000 an ounce are too many to count.
Gold’s role as currency and as an asset to protect, preserve and grow your wealth has lasted for centuries and shows no signs of losing its appeal.
As the national debt keeps rising, that means the Treasury will need to issue more and more bonds. However, there are real questions about whether investors will keep buying them at the pace the Treasury needs to sell them.
So, what did Bank of America analysts say about this question?
“Rising funding needs, debt servicing costs, and concerns over the sustainability of fiscal policy may well mean that gold prices could increase, if rates move up.”
Here’s what Bank of America concluded:
“Indeed, with lingering concerns over U.S. funding needs and their impact on the U.S. Treasury market, the yellow metal may become the ultimate perceived safe haven asset,” the analysts said. “Ultimately, something has to give: If markets become reluctant to absorb all the debt and volatility increases, gold may be the last perceived safe haven asset standing.”
Here’s what we say:
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