Protect savings during a crisis: Physical Gold vs. T-Bond

There’s an unprecedented financial crisis going on, so some people are thinking about buying gold or T-bonds. Many investors are afraid of losing their savings and considering purchasing physical gold. Is it the right choice, or is the bond market a better choice? 

This article will give you some thoughts on buying physical gold compared to U.S. treasury bonds.

Investors are frightened by inflation theories and are constantly asked to buy safe-haven assets such as physical gold.

When you’re buying physical gold, the time horizon is quite long. It doesn’t seem like a good idea to buy gold and sell it after a few months. If you want to speculate, you can choose a liquid financial instrument linked to gold prices, betting on a surge in inflation.

But no one can predict the short-term trend of inflation or the price of gold. There are many signs of inflation, but how long will it last? 

Related article: Why is everyone buying silver now?

A lot will depend on how long the Covid crisis lasts and how much liquidity the banks have to inject into the financial markets to support the economy. I think central banks overreact in the hope of avoiding a short-term crisis.

Covid will stay with us for a long time; central banks will have to keep supporting the economy. The United States will have to borrow more money. The national debt is higher than during World War II, as you can see from this graph.

Before deciding between gold and treasury bonds, the most important thing to remember is that this disaster is unprecedented. The Covid crisis has nothing to do with the 2007-2008 financial crisis; it involves various sectors in an interconnected world economy. We still don’t know much about the long-term economic damage. 

It’s not just about inflation

When I evaluate the purchase of gold, I always compare it with the purchase of Treasury Bonds. Gold doesn’t pay interest, so it doesn’t generate interest income, and it can have a cost. The fluctuations in gold prices are much more significant than those of treasury bonds. Investing in gold doesn’t guarantee the same amount back at maturity as invested in the treasury bond.

Related article: Inflation and real estate: should you buy a home?

Investors think that if inflation rises, the central bank can raise interest rates to contain it. Financial markets dislike rising interest rates, and when the Fed gets dovish, markets react with volatility.

However, we’ve seen that the public debt is increasing disproportionately due to covid-19. The treasury bond rate is linked not only to inflation and the Fed but also to other factors. When debt rises too much in proportion to GDP, the security of the bonds decreases, and rates will have to increase accordingly.

What happens if the US debt gets out of control and the US gross domestic product collapses? Can you imagine a situation where US T-Bonds become dangerous for those who own them? 

The past real estate market crisis was terrible, but it was different and limited. Interest rates were high, so central banks could intervene by lowering them and helping the economy. 

This time everything is more complicated, and the interest rates are meager, so central banks can’t lower them like last time.

In conclusion, when choosing between gold and treasury bonds, consider the public debt-to-GDP ratio. When debt rises and isn’t backed by the economy, solvency issues arise, and rates increase.

Is a bond market armageddon possible?

Banks keep injecting money as if it were growing on trees, but money is debt. I don’t understand how they plan to solve this problem. 

Central banks buy national bonds, printing money, and using it to purchase debt. If aliens came down, I don’t know what they’d think about our financial system, and they probably wouldn’t buy T-bonds.

is us public debt armageddon possible
Picture from https://nypost.com/

But in finance, everything is possible; I don’t think there will be federal bankruptcies. T-Bonds will continue to be safe even in the medium to long run. I have no idea what central banks will elaborate on to reduce public debt to GDP. I’m sure governments will find a way to save the system even if the crisis lasts longer than expected. 

There will be losses in other bond markets, but the T-bond will undoubtedly remain safe.

If the economy doesn’t collapse, rising debt will cause rates to rise and inflation to fall. In this case, the T-bond would appear to be the best choice because it yields interest, unlike gold.

The price of the T-bond will fall as rising rates will lead to the cost of older bonds falling. With the help of investment funds and ETFs, the rate increase is small, as purchases are diluted over time. 

Anyway, you won’t have to worry about price fluctuations when you sell your T-Bond at expiration. Physical gold doesn’t have a money-back guarantee.

Conclusions

I wouldn’t say I like buying gold or silver coins and prefer financial instruments. I doubt you could survive the failure and insolvency of the United States with a few gold coins. It makes me laugh to imagine people buying bread with their gold coins.

Some US bond markets will go bankrupt. Other countries worldwide will not be able to pay back their bonds. 

There will probably be stock market crashes, which are pretty standard after 14 years of unstoppable growth. Cryptocurrencies may be the new digital gold, or they might not be.

But I don’t think an armageddon for the American T-Bond is imminent, and so before I buy gold coins, I’d consider a more direct investment in the T-Bond. 

I know it’s cool to buy gold coins, but they’re expensive and kind of complicated. On top of that, a thief is more likely to break into your home than the US market is to default.

Follow me on Twitter LukkVal