It wasnt long ago that U.S. Treasuries were considered a risk-free investment.
But the financial crisis, hulking budget deficits, political gridlock and the
Standard & Poors debt downgrade have changed that perception forever. Now
theres only one safe-haven investment: gold. Since surging to a record high
$1,917.90 per ounce earlier this month, the price of gold has slipped on profit
taking. But dont let that minor correction fool you into thinking golds bull run
is over. The yellow metals best days still are ahead. How do I know? Because,
unlike U.S. debt, gold cant be downgraded. It has inherent value thats more
reliable than the word of even the most powerful country on earth. Gold was used
as currency for centuries. In fact, its still being used for transactions in
places such as China, India and much of the Middle East regions that are eager
to diversify away from the beleaguered U.S. dollar. But now golds also usurping
the role U.S. Treasuries have played for the better part of a century that of
the ultimate investment safe haven. Just take a look. The Worlds Real Risk-Free
Investment From July 21, 2009, to mid-July of this year, the correlation between
Treasuries as represented by the iShares 20-Year Treasury Bond ETF (NYSE: TLT )
and gold as represented by the SPDR Gold Trust ETF (NYSE: GLD ) was 0.5,
meaning that only half the movement of one coincided with the other. However, in
the period ranging from July 21, 2011 to Aug. 16, 2011, the correlation jumped
by 78% to 0.89. That means gold and 20-year Treasuries are moving in
near-perfect lockstep. Whats the catalyst for this shift? I believe traders are
using gold to hedge their holdings against the systemic solvency risk of a
global banking failure . Simply put, theyre looking to cover their bets should
the worst happen. Far-fetched? Not really. If the banking system crashes , it
will take the developed worlds financial system down with it. And when that
happens, its very likely that cash withdrawals or cash transfers will be frozen,
as will the credit markets. Thus, gold might be one of the few assets thats
still actively traded, meaning theres still an independent pricing mechanism in
place. You will, for example, be able to price gold at the local pawnshop just
as easily as youll be able to cut a deal on the corner of the street (though
hopefully not at gunpoint). At an institutional level, this already is
happening, albeit with a slightly different twist. ICE Clear Europe Ltd. a unit
of IntercontinentalExchange Inc. (NYSE: ICE ) and one of Europes top
derivatives-clearing companies is accepting gold as trading collateral. Earlier
this year, JPMorgan Chase & Co. (NYSE: JPM ) and the Chicago Mercantile Exchange
also started accepting gold as trading collateral. The advantage gold offers is
incontrovertible. Bonds be they U.S. Treasuries or other types of securities
are limited by their sovereign backers. That means they are only as solid as the
country thats backing them. But thats not true of the yellow metal. The lesson
here is clear: You cant downgrade gold; and that makes it the worlds only
risk-free investment.
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