Remember Lehmans? Even the smart people get whacked in a financial crash...
PEOPLE THINK the gold price always goes up in a crisis, right until they find out it doesn't. And the reason that this now feels so much like the Lehmans collapse of three years ago is that, looking at the numbers alone, you'd think it was autumn 2008.
Put silver to one side. Because with 60% of annual demand going to industry, the restless metal remains very exposed to the global economic downturn. Whereas gold, long term, tends to rise when other investments – shares, bonds, cash, real estate – fail to deliver.
Look at the grinding losses of Treasury-bond or equity holders in the late 1970s, or the Tech Stock slump of 10 years ago, or the sub-zero real returns paid to cash savers – across the world, after inflation – over the last half-decade.
By the same token, gold tends to fall when investors can see better opportunities elsewhere. Short-term US deposit rates of 19%, for instance, paid above-inflation returns of nearly 10% in 1980. Little wonder the gold price sank from its then-record peak of $850 an ounce, and kept sinking as US bonds paid an average 4% real interest rate for the next 20 years.
Whereas today? Thanks to Operation Twist already snarling everything up, 30-year US Treasury bonds now offer just 2.79% to hungry new buyers. By the time they mature in 2041, Washington's debt-to-GDP ratio will stand around 400% according to one credible estimate – a mere 2.5 times the burden about to force Greece's default – with debt-interest alone eating more than $1 in every $4 generated by what is very unlikely to remain the world's single largest economy.
In return for taking that risk, 30-year bondholders will meantime earn one full percentage point less than inflation this year. Gotta get some for your portfolio, right?
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