Gold vs. U.S. Treasuries – Which is the True Safe Haven?

The decision of FOMC to purchase $400 billion worth of LT Securities by selling Short Term Securities by the end of June 2012, may have triggered a sharp reaction in the financial markets that turned into a sharp drop in commodities, a sharp appreciation in USD, and a decrease in US stock markets and US LT Securities.

The recent shift in the direction of gold price raised the old debate among traders: which investment is more reliable to act as a Safe Haven – gold or U.S. Treasuries? And what are the merits for holding each of them?

The relation between the two investments tools is complicated: one the one hand they are both perceived as “safe haven investments”. In recent months they have even had a strong negative correlation (see chart below): as gold inclined, the yields on LT Treasuries dropped. On the other hand, at the beginning of the year they had a positive correlation so that as the yields on US securities declined, gold also fell.

The above mentions shows that gold and US treasuries are related to a certain extent, but does it mean they are both equally safe haven investments?

So let’s break down the major pros for each investment in respect to the other:

 Pros for Gold

¨     The LT yields are still high and perhaps the recent plan that Bernanke came up in the recent FOMC meeting might twist the long terms yields downward.

¨     There is high demand (mainly in Asia) for gold that could further incline in the years to come; since this precious metal is limited there is a potential growth in price.

¨     In case of an increase in inflation pressures in the major economies such as US or a sharp deprecation of USD, gold might better serve as a protection against such catastrophes.   

 Pros for LT Treasuries

¨     In regards to volatility, both investments had sharp shifts during the year, but with gold there is a potential loss if gold drops below the level you had bought it, while in LT securities this is moot.

¨     In US treasuries there is a yield that you receive, while in gold there is no yield.

 ¨     There is a cost for holding gold, and the hike on margin requirement by the CME during August may have also affected some speculators to shift away from the bullion market.

In conclusion, there is no clear winner in regards to which is a better investment. That is something each trader should consider based on his/hers risk preference; in regards to “safe haven” there pros an cons for each investment but the bottom line is if you wish to insure against highly unlikely adverse scenarios (and take into account that much like insurance, you may not “cash in”) you should lean towards gold, otherwise perhaps LT securities should be more considered as a safe haven investment; and of course there is always the option of diversifying.

 For further reading:  Gold & Silver Prices – Daily Outlook September 23

 Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.  

 This is by no means an investment advice only market analysis.      

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