Puerto Rico Default Bruises Dollar, Boosts Gold
Scott Minerd, global chief investment officer of Guggenheim Partners, said on Wednesday it is a good time to dip into U.S. Treasuries in the wake of their sell-off. “It is impossible to get the timing of anything exactly right. You have to ask yourself, ‘Are you a speculator or an investor?'” -Reuters
Puerto Rico is about to default on bond obligations today, but some of the largest bond funds in the world are starting to "nibble" on Treasuries again.
This is after an April sell-off that The Wall Street Journal and other publications attributed to "improving sentiment toward the global economic outlook sapp[ing] demand for haven debt."
Over the past few weeks, investors have been easing up on government bonds and buying riskier assets: stocks, oil, junk bonds and emerging-market equity and bonds.
Without belaboring the point, one wonders what it is that so attracts a variety of corporate investors to US debt. Saudi Arabia just threatened to sell off US$750 billion in US assets. The BRICS are doing everything they can to reduce dollar exposure.
It is almost never discussed by the mainstream media, but the totality of US obligations has been estimated to run around US$200 TRILLION. That's not a feasible number for any sovereign entity to redeem: not even a nation that the prints the world's reserve currency.
And now Puerto Rico is about to default. Here, from ZeroHedge:
Puerto Rico Says Will Default … Begs Congress For Help “Or Else Crisis Will Get Worse” ... It’s D-Day in Puerto Rico. As Bloomberg reports, investors are finding little comfort in the Puerto Rico Government Development Bank's efforts to strike a last-ditch agreement with creditors to soften the blow of a default …
The bonds that mature today (May 1st) have crashed to just 20c (disastrously below the 36-cent recovery rate the commonwealth proposed in March). It appears investors are not buying what Puerto Rico is selling and prefer to dump the bonds than hold out in hope of a ‘deal’…
And here's some recent commentary from USA Today:
The confrontation between debt-swamped Puerto Rico and its creditors is intensifying as the U.S. territory will default on payments due Monday, deepening the island’s financial crisis and placing additional pressure on Congress to intervene.
The debt crisis threatens to resuscitate moribund ideological debates over the propriety of federal bailouts and the impact of fiscal mismanagement on the lives of real people faced with insufficient services.
We were going to ask whether the default in Puerto Rico might have an impact on gold prices relative to the dollar. But Kitco answers that question this morning with the headline, "Gold Hits 15-Mo. High Above $1,300; Slumping Greenback Fuels Metals Bulls."
The dollar, of course, is depreciating against gold and "safe haven demand" is become more pronounced. And, yes, the safe-haven in this case seems to be gold and silver rather than US Treasuries. Silver reached a 15-month high over $18.00 overnight.
For so many years, sovereign debt has been flogged as the investment of choice for the risk-averse. But a quick look around the world reveals that the questionable nature of this perspective.
The European Union has virtually bankrupted the entire southern half of Europe. China, Russia and Brazil are all struggling economically. One can certainly question whether such struggles will result in a continual sovereign price erosion.
The apparent upcoming Puerto Rico default on $422 million is no minor glitch. Puerto Rico is a US Territory. Its situation will surely fuel fears about further US-based insolvency.
In fact, there are other issues taking aim at the dollar. We believe firmly that the goal of top banking elites is a single world currency. As hard as it is to believe, the dollar is gradually being destabilized, from what we can tell.
Saudi Arabia is the guarantor of the dollar-as-reserve. Yet the US and Britain are both undermining the Saudi regime. The BRICS, which are providing a dollar alternative, were invented as a unit by Goldman Sachs.
The derivatives marketplace has a notional value of over a thousand trillion dollars. A significant failure there could surely bankrupt the entire, international financial system.
Importantly, as the world transitions toward an international currency, the big anti-gold manipulations seem to have diminished. For one reason or another, those with clout in world markets seem content to let gold and silver appreciate for now.
Perhaps these money metals are seen as providing a bridge of sorts from the dollar to something else. In any event, the perilous state of sovereign debt and the apparent relaxation of anti-gold forces would seem to present an opportunity.
We've often stated that this decade reminds us of the 1970s. We've reported on the presence of stagflation. But we also recall what gold and silver did in the 1970s.
Gold and silver ran up hard at the end of the '70s - reaching prices against the dollar that have likely never been equaled, accounting for inflation.
Conclusion: Is gold on another epic run? If it is, then chances are it will outperform numerous asset classes as it did less than a decade ago. And that certainly includes US Treasuries.
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