…Could Happen in the Next Year

Also In Today’s Letter…

• The Real Safe Haven that the Treasury Can’t Offer
• Central Banks Continue to Trade Up the Buck
• Four Things to Know Before You Invest Abroad

Did you hear that the U.S. is auctioning off another $81 Billion in Treasuries this week?

Yes, that’s a bit lower than the record-high bond auctions the U.S. has held recently. (The Treasury auctioned off an astounding $123 billion in notes on October 27th.).

But still $81 billion isn’t anything to ignore.

It’s just further proof for me that sooner or later we’re going to see a day of reckoning for bonds. That’s a day when no one, (or very few) show up for the U.S. bond auction. On that day, the U.S. will have only one left to pay for all these debts they’ve been racking up.

They’ll have to print their way out of this hole they’ve dug themselves in.

You know what amazes me? With the nutcases in the world shooting off missiles, and ramping up nuclear capabilities, the bailouts here in the U.S., the countless government programs we can’t pay for, there are still some people that believe U.S. Treasuries are a “safe haven.”.

Of course I’ve proven time and again that investors who believed that and bought during the financial meltdown last year lost tons of money.

After all, yields fell to 2.20% in January, as all the Mom and Pop investors were rushing into Treasuries. That meant that prices were sky-high, and then as soon as stocks rallied again, prices started to fall.

Now will this be the auction that fails? No I doubt it. But, in my opinion, we will experience that at some time in the next year, especially given the government deficit spending!

And, should a Treasury auction fail, well being long Treasuries isn’t going to look too much like a “safe haven” position anymore, is it?

The Real “Safe Haven” that the U.S. Treasury Can’t Offer

While the U.S. government continues to peddle paper debt that may or may not sell, gold continues to rise.

As I’ve said time and again, gold is not only a hedge against both inflation and deflation, it’s also the true safe haven investment that you can’t find in the Treasury market.

While we’re talking about gold, I saw this quote that hit the nail on the head last night…

“It’s not that gold has changed, but gold buyers have changed,” said Suki Cooper, a precious-metals strategist for Barclays Capital. “It’s a structural shift we’re seeing on the investing side, from Asian central banks right down to individual investors buying ingots and coins.”

That’s right! Gold hasn’t changed. It’s still has to be mined out of the ground, it can’t be made by any alchemist.

The demand in gold has skyrocketed in the past couple of years. It’s pushing people to send in their gold bracelets, necklaces and rings to cash in as gold prices surge. So selling any and all gold they can get their hands on, and this group over there is buying it, for a rainy day.

Gold’s recent rise has been spectacular to say the least, moving through the $1,000’s to $1,100 very quickly. I think there are two things in play here…

1. The demand for gold driving the price higher.
2. The dollar is so weak that it’s forcing gold to rise.

I heard a guy say the other day that “Gold hasn’t gained. The dollar has gotten weaker…”

What? Nothing about the demand? You better check your facts again, guy.

Central Banks Keep Trading Up the Dollar

The folks over at Barclays say that they have recalculated the dollar’s share of global currency reserves.

The dollar once stood at 80% of global reserves. Back in 2002, before the weak dollar trend, the dollar made up 73% of global reserves. Now that has fallen to 62.8%.

But, says Barclays, this is almost entirely a result of weaker valuation rather than attempts by central banks to diversify holdings away from the dollar.

Hmmmm… Now, I do agree that the Euro’s gains vs. the dollar in the past seven years would cause quite a bit of slippage in the dollar’s value in terms of central bank reserves.

But “almost entirely?” I sincerely doubt it.

One could point at the Reserve Bank of India’s gold purchase last week. They bought $6.7 Billion “worth” of gold. You can’t tell me that wasn’t to diversify their reserves!

And notice central banks are diversifying out of the dollar. Who’s to say when they’ll stop buying our Treasuries too?

That’ it for today… Hey! Tomorrow is a holiday! It’s Veteran’s Day tomorrow. My dad was a Veteran, and each year, I go back to a story that my darling daughter, Dawn told me. A few years ago, at Dawn’s school, they had a Veteran’s Day celebration, and had everyone bring in pictures of relatives in their military uniforms. When the picture of my dad, (Dawn’s grandpa) came up on the screen, she was amazed, and sent me a note saying she had never seen how much I look like her grandpa (my dad). So, let’s stop to think about why the day is a holiday! And thank a Veteran…

That’s all… I hope you have a Terrific Tuesday!

Chuck Butler

Chuck Butler serves as both a senior editor of The Currency Capitalist and a senior contributor to FX University Daily. Chuck Butler focuses on the factors that affect a currency’s value over the long run – from trade and fiscal balances to interest-rate policy and credit expansion. Because of his concentration on the fundamentals, he has correctly called the dollar’s demise and the euro’s rise since 2001. As you read above, Chuck is also calling for the 27-year bull market in Treasuries to end in the next year. Read more on this prediction in his latest special report.