Dollar Weakness Better Played Via Short-Treasuries Instead Of Long-Gold

Inflation protected treasury securities are priced as if gold prices have over-reacted to dollar fears.

The bond market’s current expected U.S. 10-year inflation rate is only 1.99% based on the recent Treasury Inflation Protected Securities (TIPS) yield of 1.42% vs. the standard U.S. 10-year Treasury of 3.41%.

The chart below from Carpe Diem shows historical inflation expectations by this measure.  Note the latest value, 1.75%, is slightly dated.

Tips

Despite a recent increase in inflation expectations from the bond market, 1.99% is still a far cry from what many gold bulls are expecting.

Thus if one disagrees with the bond market’s expectations, then shorting it might be a better bet than gold. This is because with gold, the market price has already run up substantially on dollar-weakness and inflation expectations (plus other reasons as well) thus any new gold purchase is chasing a rally to some extent, even if gold has further to run.

With treasuries on the other hand, the market hasn’t yet moved substantially on any such expectations. Thus a short position isn’t late to the game, in fact it is ahead of what the market currently expects. This likely makes risk-reward stronger than gold here for a similar weak-dollar view.

Yet there’s one important caveat – the bond market could end up right, which would likely be bad news for gold or any short position against treasuries.

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