Confessions of a Money Manager: Which will win -- gold or U.S. Treasuries?
StoryDiscussionFont Size:Default font sizeLarger font sizeRay Unger | Posted: Friday, January 15, 2010 3:45 pm | 1 Comment
Investors generally classify high-risk and low-risk investments by asset category, with U.S. Treasuries considered the lowest risk, and microcap growth stocks with blood-pressure sized price-to-earnings ratios the highest risk. But sometimes the price variations of these assets can turn things upside down. Those who bought conservative real estate in 2006 know the feeling.
Looking ahead to 2010, investors need to be aware that some asset categories are out of whack with historical prices. How do such price anomalies occur? Every investor should know that prices are the handmaiden of expectations and today’s expectations highly confusing.
Let’s take two of today’s most popular assets: gold and U.S. Treasury bonds.
The current price of gold is $1,140 per ounce. At the beginning of 2000, that same ounce could be bought for $290. So gold has jumped 293 percent or compounded at a rate of 11.2 percent per year since 2000. An outstanding performance, especially since the stock market, as measured by the S&P 500, lost 13 percent over that same period and compounded at a negative 1.4 percent annual rate.
Likewise, silver jumped from $5.25 an ounce in January 2000 to $18.50 today. I bring up silver because I was one of those geniuses who bought a dozen one-ounce silver ingots back in March 1980 at $20 apiece. That price looked awfully attractive after the metal peaked at just over $54 an ounce earlier in the year. So 30 years later, I’m close to breaking even.
But let’s get back to gold.
Yes, it’s been a spectacular investment in the last decade, but what’s it done since I bought my silver ingots? In January 1979, gold sold for $210 an ounce. In early 1980, however, gold got swept up in the silver frenzy when two sons of H. L. Hunt, patriarch of the wealthy Texas Hunt family, pooled their millions with several wealthy Arab princes and formed a silver pool. In their attempt to corner the silver in the market (at one point they held half of the world’s supply) silver zoomed to more than $54 an ounce, and gold hit $850 an ounce in sympathy. The story is fascinating. Read it here. (http://www.buyandhold.com/bh/en/education/history/2000/hunt_bros.html).
To make a long story short, their attempt to corner the silver market failed and on March 27, 1980, the metal fell to $10.80 an ounce. Gold, after hitting a record $850, likewise fell to just below $300 an ounce. Too bad for the Hunt brothers; they declared bankruptcy and in 1988 were convicted on conspiracy charges.
But here’s the real kicker. While all this was happening, the Dow Jones Industrial Average hit a peak of 904 in early 1980. After the silver fiasco, the Dow slumped some 16 percent to 760. Just store that number in the back of your mental hard drive.
Now let’s talk about U.S. Treasuries.
In late 1979 and early 1980, high inflation and interest rates were gagging the economy. The Consumer Price Index had jumped 13 percent in 1979, and the prime rate was sitting at an incredible 22 percent. Reflecting these tenuous times, U.S. Treasury securities were yielding in the low double-digits: 12 to 16 percent. So here’s the picture in 1980: high inflation, high gold and silver prices, and high interest rates.
Fast forward to today. Gold and silver are now selling at $1,140 and $18.50 an ounce, respectively. Meanwhile, the Consumer Price Index is tracking toward 1.7 percent for 2009, and interest rates are at historic lows. The prime rate is now at 3.25 percent and 2-year, 5-year, 10-year, and 30-year Treasuries are yielding 0.96 percent, 2.54 percent, 3.79 percent, and 4.72 percent.
What am I missing? Isn’t gold supposed to be high when inflation is raging? And when inflation is high, aren’t interest rates supposed to be well above the norm, say in the 6 percent to 8 percent range?
Today, however, inflation is below 2 percent, interest rates are at all-time lows, and yet gold is making new highs at $1,140 an ounce. Obviously, the buyers of gold expect inflation to soar, right? So let’s play that out. If inflation goes up, gold will likely hit new highs. Concurrently, the underlying values of U.S. Treasuries will fall as interest rates move much higher. If that happens, the loss of principal could be staggering.
If inflation stays muted, then the price of gold could suffer as inflation expectations wind down. But since Treasuries are already at historic lows, they can’t appreciate, so investors are left with very low coupons.
Meanwhile, let’s retrieve that bit of information about the Dow Jones. Remember it peaked at 904 in February 1980 and slumped to 760 after the metal prices collapsed? Today, the Dow Jones is at 10,670, or up almost 12-fold from the 1980 high. Is gold a good bet now? How about Treasuries? My guess is over the next 10 years, the Dow will beat them both.
StoryDiscussionFont Size:Default font sizeLarger font sizeRay Unger | Posted: Friday, January 15, 2010 3:45 pm | 1 Comment
Investors generally classify high-risk and low-risk investments by asset category, with U.S. Treasuries considered the lowest risk, and microcap growth stocks with blood-pressure sized price-to-earnings ratios the highest risk. But sometimes the price variations of these assets can turn things upside down. Those who bought conservative real estate in 2006 know the feeling.
Looking ahead to 2010, investors need to be aware that some asset categories are out of whack with historical prices. How do such price anomalies occur? Every investor should know that prices are the handmaiden of expectations and today’s expectations highly confusing.
Let’s take two of today’s most popular assets: gold and U.S. Treasury bonds.
The current price of gold is $1,140 per ounce. At the beginning of 2000, that same ounce could be bought for $290. So gold has jumped 293 percent or compounded at a rate of 11.2 percent per year since 2000. An outstanding performance, especially since the stock market, as measured by the S&P 500, lost 13 percent over that same period and compounded at a negative 1.4 percent annual rate.
Likewise, silver jumped from $5.25 an ounce in January 2000 to $18.50 today. I bring up silver because I was one of those geniuses who bought a dozen one-ounce silver ingots back in March 1980 at $20 apiece. That price looked awfully attractive after the metal peaked at just over $54 an ounce earlier in the year. So 30 years later, I’m close to breaking even.
But let’s get back to gold.
Yes, it’s been a spectacular investment in the last decade, but what’s it done since I bought my silver ingots? In January 1979, gold sold for $210 an ounce. In early 1980, however, gold got swept up in the silver frenzy when two sons of H. L. Hunt, patriarch of the wealthy Texas Hunt family, pooled their millions with several wealthy Arab princes and formed a silver pool. In their attempt to corner the silver in the market (at one point they held half of the world’s supply) silver zoomed to more than $54 an ounce, and gold hit $850 an ounce in sympathy. The story is fascinating. Read it here. (http://www.buyandhold.com/bh/en/education/history/2000/hunt_bros.html).
To make a long story short, their attempt to corner the silver market failed and on March 27, 1980, the metal fell to $10.80 an ounce. Gold, after hitting a record $850, likewise fell to just below $300 an ounce. Too bad for the Hunt brothers; they declared bankruptcy and in 1988 were convicted on conspiracy charges.
But here’s the real kicker. While all this was happening, the Dow Jones Industrial Average hit a peak of 904 in early 1980. After the silver fiasco, the Dow slumped some 16 percent to 760. Just store that number in the back of your mental hard drive.
Now let’s talk about U.S. Treasuries.
In late 1979 and early 1980, high inflation and interest rates were gagging the economy. The Consumer Price Index had jumped 13 percent in 1979, and the prime rate was sitting at an incredible 22 percent. Reflecting these tenuous times, U.S. Treasury securities were yielding in the low double-digits: 12 to 16 percent. So here’s the picture in 1980: high inflation, high gold and silver prices, and high interest rates.
Fast forward to today. Gold and silver are now selling at $1,140 and $18.50 an ounce, respectively. Meanwhile, the Consumer Price Index is tracking toward 1.7 percent for 2009, and interest rates are at historic lows. The prime rate is now at 3.25 percent and 2-year, 5-year, 10-year, and 30-year Treasuries are yielding 0.96 percent, 2.54 percent, 3.79 percent, and 4.72 percent.
What am I missing? Isn’t gold supposed to be high when inflation is raging? And when inflation is high, aren’t interest rates supposed to be well above the norm, say in the 6 percent to 8 percent range?
Today, however, inflation is below 2 percent, interest rates are at all-time lows, and yet gold is making new highs at $1,140 an ounce. Obviously, the buyers of gold expect inflation to soar, right? So let’s play that out. If inflation goes up, gold will likely hit new highs. Concurrently, the underlying values of U.S. Treasuries will fall as interest rates move much higher. If that happens, the loss of principal could be staggering.
If inflation stays muted, then the price of gold could suffer as inflation expectations wind down. But since Treasuries are already at historic lows, they can’t appreciate, so investors are left with very low coupons.
Meanwhile, let’s retrieve that bit of information about the Dow Jones. Remember it peaked at 904 in February 1980 and slumped to 760 after the metal prices collapsed? Today, the Dow Jones is at 10,670, or up almost 12-fold from the 1980 high. Is gold a good bet now? How about Treasuries? My guess is over the next 10 years, the Dow will beat them both.
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