Don't Flock to the Wrong Safe Haven

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Perhaps as a force of habit, or maybe on some questionable advice, some investors continue to trust their hard-earned investment capital in U.S. Treasury bonds every time volatility and uncertainty cast their unsettling shadows over stock markets.

In a global marketplace where virtually every sector and asset class around the globe came under concerted selling pressure Tuesday, U.S. Treasury bonds were a noteworthy exception. The double-long ProShares Ultra 20+ Year Treasury (NYSE: UBT  ) ETF finally appears to be catching a bounce following months of steady deterioration. I don't pay much attention to daily market moves, but I do continue to see Treasuries serving as a default target for investors seeking shelter and safety.

Before you join this apparent crowd in viewing U.S. debt as a viable safe haven, however, I am here to remind you that conventional wisdom may no longer be very wise. To the contrary, an older conventional wisdom -- one that has been forgotten and abandoned for much of our modern era -- has reasserted its timeless allure for some of the same reasons that I consider Treasuries unattractive.

I refer to gold and silver. At the core of this ongoing secular bull market in precious metals, Fools will find: a massive scale of impairment of the dollar's suitability as a de facto reserve currency, the exploded balance sheet of the Federal Reserve, ballooning debt burdens at all levels of government, and a very protracted period of hyper-accommodative monetary policy (maintaining bond yields at artificially low levels while simultaneously stoking inflationary pressures). These conditions, simply, are friendlier to precious metal prices than they are to Treasury bonds.

The case against Treasuries
Amid Tuesday's global market retreat triggered by the series of devastating events impacting Japan (the world's third largest economy), a move into Treasuries appears counter-intuitive on multiple levels. For starters, consider that noted bond trader Bill Gross revealed a complete liquidation of U.S. Treasury bond exposure from PIMCO's $237 billion Total Return Fund just days before the magnitude 9.0 earthquake and resulting tsunami struck Japan last Friday. Explaining this rather unconventional move, Gross posed the rhetorical question referring to the looming termination of the Fed's $600 billion QEII program of direct Treasury bond purchases: "Who will buy Treasuries when the Fed doesn't?"

Treasury secretary Tim Geithner sought to reassure markets Tuesday by opining that Japan would not need to liquidate Treasury holdings to fund response and reconstruction efforts, but that frankly skirts the larger question of whether reduced Japanese demand for U.S. debt may exacerbate an already difficult transition from the QEII program (under which the Fed has purchased some 70% of all U.S. debt issuance).

Furthermore, because I believe that U.S. economic recovery was already skating on perilously thin ice, I agree with economist Robert Shiller that quake-related interruption to Japanese economic activity could prove something of a tipping point for world markets. I submit, further, that these events may reawaken stimulus-sedated distress in debt-burdened economies like the United States, the United Kingdom, and Europe. Facing the likely prospect that demand for Treasuries will be wholly insufficient to replace the Fed's dominant share of current bond purchases -- as paired with potential stock market declines, rising gasoline prices, and other potential follow-on impacts of the disaster -- I consider additional rounds of quantitative easing to be a foregone conclusion. When state and municipal budget shortfalls and unfunded pension liabilities truly exert their pressures upon the domestic U.S. economy, I believe Ben Bernanke will continue to respond the only way he knows how: by firing up his helicopter yet again.

The safest havens
In the final tally, the long-standing reign of the U.S. dollar as the world's dominant reserve currency appears locked in a steady decline. Meanwhile, nations like China with tremendous reserve balances are eager to build their allocations to gold over time, and broad-based retail investment demand across Asia has continued to pressure available global supply (especially with respect to silver). Silver is ultimately tethered to gold, as if by the stretchy cord of a slingshot. These ancient currencies are immune to impairment by debt, and to devaluation through reactive monetary policies. Contrary to Treasury bonds, the anticipated inflationary impact of those monetary policies actually enhances the allure of gold and silver. Should deflation rule the day as some fear possible, then the Fed's proven track record of massive interventions stands as a golden backstop. Critics of gold and silver enjoy teasing the apparent contradiction, but no matter whether Fools seek shelter from inflation or deflation, precious metals offer the rational safe haven.

My colleague Andrew Sullivan made the rational choice when he opted to hold the cash balance for his Rising Stars portfolio in gold. He smartly selected the Sprott Physical Gold Trust (NYSE: PHYS  ) over the more widely traded SPDR Gold Trust (NYSE: GLD  ) . I too consider the SPDR Gold Trust one to avoid. Because I consider silver poised to deliver superior price appreciation to even gold, I prefer Central Fund of Canada (AMEX: CEF  ) for its roughly even split between unencumbered holdings in gold and silver (please understand the tax implications carefully).

Even if Fools may be raising their non-equity allocations after the seemingly unstoppable rally stopped short, carefully selected stocks will continue to offer a safe haven of their own. Individual bullish prospects can be found within most sectors, but I consider quality miners of gold and silver among the finest investments to choose from when indiscriminate selling like we witnessed Tuesday creates alluring opportunities for entry.

Although Yamana Gold (NYSE: AUY  ) just monetized its massive Agua Rica development project on extremely favorable terms, that stock continues to trade at an extreme bargain valuation. Gammon Gold (NYSE: GRS  ) , meanwhile, may be the most underrated gold stock of all. Endeavour Silver (NYSE: EXK  ) , a recent inductee to the Big Board, has snapped back nicely in recent days for those looking to catch a runaway growth stock.

Whether you opt for a bullion proxy, mining stocks, or both, the time has come to cease treating U.S. Treasuries as the default place to turn when markets make you nervous. Inherent volatility aside, I maintain that gold and silver will prove to be among the safest havens available for several years to come.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Central Fund of Canada, Endeavour Silver, Gammon Gold, and Yamana Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On March 16, 2011, at 3:19 PM, jimmy4040 wrote:

    You are right on the money! When the smoke clears in a few weeks, look for the Fed to announce an extension of QE2, or even possibly QE3 in some form. No way can they back out of the market with Japan leaving at the same time. If yields on the 10 year drop below 3%, it will be time to buy fistfulls of inlfation plays. I'm going to be short using TBT, but others will choose diffrerently.

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