There's been lots of chatter about a gold bubble. But I think you
can make a much stronger argument that Treasuries are in the midst
of history's biggest bubble right now.
Let me back up, because I know I'm making some short-cut
assumptions that you might not make for yourself.
- I'm assuming that gold IS money. That is, it's a store of
value and a medium of exchange.
- I'm assuming that the definition of a bubble describes when
an asset is overbought to the point that its price is much, much
higher than it should be.
- If I can safely make these assumptions, then I think it's
fair to compare gold to another form of money: the dollar, and by
proxy U.S. Treasuries.
If we can agree that U.S. Treasuries are a fair proxy for the
dollar, and that gold is money - then I truly struggle to see how
ANYONE can come to the conclusion that gold is in a bubble, while
simultaneously seeing Treasuries as not being in a bubble.
In 2009 the total amount of gold mined, from every mine, in every
country for the whole year amounted to $90.6 billion. That was
about 90 metric tons more - or a little under $3.5 billion - than
the amount mined in 2008. If you're keeping score, I'm using gold
at $1,200 an ounce as my price point.
That $90.6 billion includes all gold for electronics, jewelry and
According to the 2008 US Geological Survey, less than 10% of all
gold is turned into bullion - most of it becomes jewelry, or is
used in dental or medical services.
So it's safe to say that only about $9 billion worth of gold was
turned into bullion last year - maybe a little more, but not much.
The U.S. mint only minted about $1.7 billion worth of gold into
gold eagles, buffaloes, etc.
So, let's round it up to an even $10 billion worth of gold bullion
sold last year. That's small potatoes, really.
annual list of a few dozen billionaires
who could each buy all of the world's annual bullion production.
Federal government actually loses more than twice
that every year
So $10 billion seems like a drip in the ocean.
In any event, that $90.6 billion of new gold in world circulation
is still a tiny number, especially when you compare it to the
amount of money going into US Treasuries today.
An article last year in
reminded me of the
size of the Treasury market
"The government will auction $69 billion of the maturities next
week, according to the median forecast in the survey, compared with
$70 billion last month and a record-tying $81 billion in
So at the current sales pace, the U.S. Treasury will sell at least
10 times more Treasury notes than the total amount of gold produced
this year. But that's just U.S. bonds - it doesn't account for any
debt sold out of the Euro-zone, or Asia, South America, Africa, or
Australia - which is nothing to sneeze at.
U.S. Treasury sales have ballooned over the past 10 years:
Meanwhile, gold production (and sales) has stayed relatively flat.
Right now, Treasuries are still selling near their record high
prices. The yields are near all time lows. There's huge demand for
Treasuries, and both in volume of sales as well as growth of sales,
Treasuries dwarf gold.
If you're eschewing gold, but buying Treasuries (especially
long-term Treasuries) I've got to wonder about the thought process
- especially as more and more sovereign debt issues spring up
across the pond. Today Portugal's debt just got downgraded, and if
you think the Atlantic Ocean will protect us from the same exact
problems, then I guess you should keep buying Treasuries.
It's worked so far.