The investment community took a deep breath and sat back to consider the recent stunning proclamation by Bill Gross, one of the world’s most respected bond-fund manager. He announced that bonds were now too risky for him, and he was ready to buy gold and real estate. 1
Gross stated, “Sovereign bond yields at record lows aren’t worth the risk and are therefore not top of my shopping list right now; it’s too risky.”
In recent history, most professional analysts and traders have considered U.S. Treasuries the safest class of securities. An additional aspect of conventional wisdom often runs that the returns on those bonds, no matter how low, make them preferable to other safe-haven investments such as gold. This may now be changing.
A Time to Test Conventional Wisdom
Today’s world economic situation has created a climate where the normal views on investing are under increased scrutiny. For example, for Gross to use the term “high risk” with regards to sovereign bonds was unthinkable only a few short months ago. However, the ongoing irresponsibility of most governments in fiscal and monetary policies underlies this new environment.
Living in a paper currency world economic system, the vast majority of governments are using their fiat money rights to run their printing presses 24/7 while continuing to rack up annual deficits with runaway spending. The unprecedented level of global debt now owed by these countries is simply beyond the ability to repay, making ongoing spending and printing of paper currency unsustainable.
Gross sees and understands this all too well. As the genius behind Pacific Investment Management Co, the world’s largest bond fund, he looks at the consequences when these policies are forced to end. He notes that there is no good scenario for bonds in today’s environment.
Further declines and negative yields mean investors lose money the moment they buy a bond. Moreover, any positive improvements will bring greater losses. Gross explains, “Low yields mean bonds are especially vulnerable because a small increase can bring a large decline in price.”
When Markets Create Opportunities
Longtime investors in gold and silver understand the market is a creature of cycles. Of course, serious traders and long-term investors avoid buying and selling solely based on these cycles. However, understanding major trends and market directions is essential to a profitable investing strategy. The realities of today’s markets make it clear that the “safe” investments of sovereign bonds are riskier than ever before. This is a time when gold and silver assets protect both long-term purchasing power and avoid the risks of the paper currency markets. That makes it an ideal time to carefully reconsider portfolio rebalancing by investing in gold and silver.