Avoid Treasurys and sell gold now

Don't follow the herd, because nothing has fundamentally changed about our economy or the market.

By InvestorPlace Aug 9, 2011 7:16AM

By Charles Lewis Sizemore, InvestorPlace.com


After the stock market tanked Monday, thanks in part to Standard & Poor's historic downgrade of the United States' credit rating, investors are left with one enormous question on their lips: What do we do now?


Well, I have three tips for you, and they may not be popular. That's because I advise running against the herd by selling gold, avoiding Treasurys and hiding out in blue-chip stocks.


Why run against the herd? Well, one big reason is the Treasury market itself, which should be linked most closely with the S&P downgrade. In a normal world, this would cause yields to rise, as investors would demand a higher yield in response to lower credit quality. Yet in the upside-down world of today's market, yields instead fell. Investors sold off their stock positions because of the bond rating downgrade, then promptly plowed their money into downgraded bonds. The 10-year Treasury now yields less than 2.4%.


But don't panic. Nothing fundamentally has changed in the economy. It was bad before the announcement, and it still is bad today. S&P's announcement changes nothing. The Federal Reserve has said that it will continue to accept U.S. Treasurys as collateral and that, as far as the Fed is concerned, Treasury debt still counts as AAA for the purposes of bank capital requirements. In other words, the people who run the international banking system don't appear to be all that worried.

Still, investors are scared, and the markets are in chaos. You need to do something, right? Well here are a few suggestions:


1. Stay out of Treasurys. Do I think the U.S. government is at risk of default? Absolutely not. I have no doubt the bonds will be paid. But at a pitiful 2.39%, investors are locking in a cash return that is almost sure to disappoint -- and almost certainly capital losses to boot. When the markets return to some semblance of normal, yields will rise back to a more sensible range of 3% to 4%. That means that investors buying today at 2.39% will see their "safe" Treasurys decline in value. More adventurous traders might want to short Treasuries in the futures markets or using an inverse ETF like the iShares Lehman Short Treasury Bond (SHV).

 

2. Stay out of gold. I understand the argument that gold is insurance against capital market instability. I get that. But would you buy insurance on your home after it already had burned down? Or on your car after it already had been totaled? In the real world of insurance, no agent would sell you a policy after the event has happened, but in the financial world, agents are all too happy to do so.


Remember, gold has no "intrinsic value" as it pays no income and has no earnings. So it is impossible to ever say whether gold is cheap or expensive. All we can say is that gold has been in a raging bull market for more than a decade, and its price action is starting to look like a lot of other financial bubbles we’ve seen in the past.

 

If you missed out on gold’s recent gains, you’re probably kicking yourself. Don’t. Once the dust settles, it is likely to be the gold bugs who are kicking themselves. I recommend avoiding gold, but more adventurous traders might want to short it, like Treasuries, in the futures market or using an inverse fund like the PowerShares DB Gold Double Short ETN (DZZ).

3. Use this as an opportunity. Buy some of the solid blue chips you’ve been itching to buy "if only they were a little cheaper." I recommend American and European companies with rock-solid balance sheets, consistent dividends and a large presence in emerging markets. These are the kinds of companies you know will survive this mess intact. If you end up being a little early, what of it? If you buy a good company at a good price, a little short-term volatility is nothing to be afraid of.

 

Some stocks to consider as value buys include: Nestlé (NSRGY), Unilever PLC (UL), Johnson & Johnson (JNJ), Microsoft (MSFT) and Intel (INTC). I should mention that Microsoft and Johnson & Johnson now have a higher credit rating than the United States. (Microsoft owns and publishes MSN Money.)


I understand it is scary out there. But it is times like this when an investor can differentiate him or herself by taking a bold, contrarian stand. Use the current mood of hysteria to your advantage. Sell down your expensive bond and gold holdings and reallocate your funds where you can find real, durable value.


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9Comments
Aug 9, 2011 12:31PM
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      Mr. Sizemore has no idea what he is talking about.  Let's look at the absurdity of the 3 points he has made in this article:

 

     1. Stay out of Treasurys. Do I think the U.S. government is at risk of default? Absolutely not. I have no doubt the bonds will be paid.

        He is right to say stay out treasuries but his argument for doing so is incorrect.   Although it's technically true that the government is not at risk of default the government will pay it's bills by getting the FED to print more money.   Printing more money to pay off the out of control debt of the U.S. government is de facto default on the debt.   The real reason you should stay away from treasury's is because you are going to get paid  in hyper inflated dollars.   China and many other countries figured this out a long time ago.  That's why they aren't buying U.S. treasuries and are dumping the ones the have.  The smart money isn't going to buy U.S. treasuries if they know they are going to get paid back with the equivalent of monopoly money.

 

2. Stay out of gold. I understand the argument that gold is insurance against capital market instability.

      Mr. Sizemore doesn't understand at all.  Gold is not an insurance against capital market instability.  Gold is an insurance against debased currencies.   Gold is now functioning as a currency and not just an asset, because the dollar and the euro are backed by nothing but debt.   The market instability is not the issue.  The issue is the debt of the United States and Europe.  The U.S. will "pay " it's debt by having the FED print more money.  This will further inflate the currency of the U.S. and degrade the value of any assets or wealth denominated in dollars.  The smart money is simply buying gold to avoid the impending currency inflation disaster that is going to happen probably within the next 12 months.   Don't listen to Mr. Sizemore's nonsense.  Keep the gold and silver you have and buy more if you can.

 

3. Use this as an opportunity. Buy some of the solid blue chips you’ve been itching to buy "if only they were a little cheaper." I recommend American and European companies with rock-solid balance sheets, consistent dividends and a large presence in emerging markets.

    Mr. Sizemore is obviously a shill for the stock market.  With dollar and the euro about to inflate inflate into obscurity  the safe place to be is in commodities.  In fact commodities have out performed the stock market  consistently over the last ten years.  It makes no sense to dump your money in the stock market if in twelve months the dollar will be nearly worthless.  You'll end up with a lot of blue chip stocks that won't buy you a loaf of bread at the supermarket.  That may sound far fetched to some of the readers out there, but I'm serious folks. Given the astronomical debt looming over the United States and Europe It could get this bad  by the end of 2012.  Don't' listen to this shill and put your money in gold , silver or any other real physical asset.   Forget the worthless paper pushers on wall street and protect your wealth.

 

 

 

Aug 9, 2011 12:29PM
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Stromprophet above says:
 

"The action on the Treasuries markets makes perfect sense. The downgrade was ridiculous nonsense from S&P and most analysts know it. In this kind of volatility and fear, traders head to the safest most liqiud position....and that's *still* US Treasuries."

 

I would argue the reverse. The downgrade makes perfect sense. The Treasuries markets was ridiculous nonsense from investors. Most COMMON SENSE people know that US can NOT pay back all her debt - it has to inflated treasuries debt out of existence, whether tax increase or spending cut is implemented by current or future congress.

 

The author says:

"would you buy insurance on your home after it already had burned down", and therefore we should stay out of gold.

 

This is the most childish argument against gold I heard so far. I am not hardcore gold bug, though I own some GLD in my porfolio since 2005, and I always want to hear from people why I should sell my GLD. First of all, if the author thinks that the house has already been totally burned down, she must be asleep. Dollar is still the reserve currency today, and the decline and importance of dollar will last for decades. So, don't count out gold yet.

Aug 9, 2011 9:37AM
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The action on the Treasuries markets makes perfect sense. The downgrade was ridiculous nonsense from S&P and most analysts know it. In this kind of volatility and fear, traders head to the safest most liqiud position....and that's *still* US Treasuries.

 

When they downgraded Japan years ago, yields just kept dropping and demand kept growing. The US Treasury is in an even stronger position, because it's the reserve currency. So it makes perfect sense, where else are money managers going to park their moving around money?

Aug 9, 2011 4:57PM
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Demand for Treasuries actually *jumped* after the S&P downgrade. How about them apples.- Stromprophet

   True, but I guarantee you the demand wasn't coming from China or anybody who has sense enough to know the dollar is worthless.  I'm not talking about the short termers who are looking to dump their money in something.   Long term, people are going to dump treasuries when  the FED revs up the printing press and the dollar inflates.  That's almost a certainty.

 

When's the last time you paid gold coinage for anything? Never, ok. -Stromprophet

    You ask where I can pay gold coinage for something Stromprophet?   Try Utah.  The state of Utah recently legalized both gold and silver coinage as currency.  That's not my opinion. That's a fact.  Google it for yourself if don't believe me. Gold and silver are currencies in the United States now.    Moreover, other states are considering doing the same thing.  Why are they doing that Stromprophet?  The answer is because people know the dollar and the euro are worthless pieces of paper.  Your argument about the perceived value of gold is valid however.  In a truly road warrior like scenario I would spend my money on obtaining food supplies, energy sources (oil, solar, etc), water supplies, and weapons because those are the only things that would have any real value in that kind of nightmarish reality; however,  in this situation gold does still have value because historically people have assigned it a value as a precious metal.  As long as the financial system ( and society ) doesn't totally collapse that will be the case indefinitely.  I'll make a deal with you stromprophet.  You dump all your money in stocks and I'll keep mine in gold and we'll see who has more real wealth 12 months from now.  Gold has absolutely no chance of collapsing in the the next 12 months because the dollar has nowhere to go but down over that same period of time- way down.   Plot a graph of the value of gold versus the value of the dollar over the last 100 years stromprophet.  The dollar has lost around 96 percent of it's value over the last 100 years while gold -even with the collapse you mention- is still solid.  

 

 

 

 

 

Aug 9, 2011 7:41PM
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From Stromprophet:

"Ratings downgrades are not about the long term ability to pay debt. That is what ratings outlooks are for. If you are downgrading the current debt position, you are saying there is a *current* danger of the debt not being paid now (i.e. payments being missed). Which is nonsense. "

 

Oh, come on. You really need to have some common sense. A tripe A rating really requires the debtor to be able to pay BOTH short term AND long term, period. Imagine a company that has some short term cash to service interest payment, but is up to neck in long-term debt, with no prospect of additional revenue and no propect to pay its long term debt. If you were the banker, were you loan that company additional money? I won't.

 

As for your comparison with a household, it is equally ridiculous not to understand its income and spending level. Again, any prudent banker will definitely have to look at those "details".

 

As for the rest of your rant against S&P, I am sorry I am not interest in their motives.

Aug 12, 2011 1:10PM
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Stromprohet writes:

A) Central banks are buying no more gold today than they sell (the argument they are accumulating gold is blatantly false).

 

You are very wrong: Central Banks, so far in 2011, have purchased more than double the gold they bought in all of 2010. Look it up. Maybe all of your other points need to be researched further before you write.     

Aug 9, 2011 2:09PM
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I completely agree. I Exchanged 10% of my cash/bonds for stocks today. Every 5 or 10% down I will do the same until I am 100 % invested. Then sell every 20 to 25%increase until you are back to 60/40 stocks/ (bonds & cash)  again.  A simple formula that has served me very well.  People say buy low and sell high but no one ever tells you how. And that it means selling euphoria and buying panic.
Aug 9, 2011 2:12PM
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 would argue the reverse. The downgrade makes perfect sense. The Treasuries markets was ridiculous nonsense from investors. Most COMMON SENSE people know that US can NOT pay back all her debt

Who is using Treasuries....people​ who are moving money around. So therefor, as most traders/investors pointed out, the downgrade was more based on politics than actual math.

 

In addition to the S&P actual analysis of the economic position being virtually non-existent in their report. And again, this is the same S&P that rated mortgage debt AAA. Yes, their analysis is *always* spot on.

 - it has to inflated treasuries debt out of existence, whether tax increase or spending cut is implemented by current or future congress.

Ratings downgrades are not about the long term ability to pay debt. That is what ratings outlooks are for. If you are downgrading the current debt position, you are saying there is a *current* danger of the debt not being paid now (i.e. payments being missed). Which is nonsense.

 

Compare this to a household, the household has income (that pays for its current debt level), the ability to produce more income, and it is recieving a ratings downgrade for a *guess* about what future income and expenditures will be. Looking at it in these terms highlights how ridiculous it is.

 

Forget about the spending level and income for a minute. This would be a bank downgrading a customers credit who has *never* been late on a single payment, missed any payment, and repaid every single one of its debts in full. The criteria for credit rating is very explicit, and S&P is way, way out of their normal analysis (compared to many other ratings they provide)

 

And of course, the answer is obvious. They are in a life and death fight with the US government *and* Private Investors who are all suing them for their 2008 ratings being complete garbage and defrauding investors globally. So they are pulling out one of those tools. This started almost immediately after investigations into them starts and the SEC tried to clamp down on them.

 

This started back in 2009/2010 when those investigations and regulations started. They started threatening the credit rating way back then.

 

Dollar is still the reserve currency today, and the decline and importance of dollar will last for decades. So, don't count out gold yet.

..................?

 

Ok, yet your analysis on treasuries would say the opposite. That demise is immenint. Because that's what a downgrade means. It means the currency is collapsing now, not later.

Aug 9, 2011 2:07PM
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China and many other countries figured this out a long time ago.  That's why they aren't buying U.S. treasuries and are dumping the ones the have.  The smart money isn't going to buy U.S. treasuries if they know they are going to get paid back with the equivalent of monopoly money.

No they're not.

 

China has no where else to put the money. The Euro is even worse shape than the dollar, the Yen pays even less than the Dollar, and the Yuan is a joke as far as a reserve currency.

 

Demand for Treasuries actually *jumped* after the S&P downgrade. How about them apples.

 

Gold is an insurance against debased currencies.   Gold is now functioning as a currency and not just an asset

Hogwash.

 

A) Central banks are buying no more gold today than they sell (the argument they are accumulating gold is blatantly false).

 

B) When's the last time you paid gold coinage for anything? Never, ok.

 

C) Any reason a "trader" gives you for gold value is complete opinion. It has no fundamental value except that which is assigned by investor sentiment.

 

The age old argument is that gold maintains value as a store of wealth. That's all great and well, but the fact is the value is arbitrary. See previous gold collapse. The argument to be wary of gold is simple, it's not being driven by *people* accumulating it. People aren't accumulating it for currency. Institutional and Retail Investors are accumulating it and they are not going to spend it as currency.

, because the dollar and the euro are backed by nothing but debt. 

What exactly is gold backed by? There's no fundamental demand for gold because it has limited usage for anything at all. Other than the percieved value people assign to it (which is no different than just about any form of money). The difference being in terms of global economics, it's highly illiquid, there's little if any real gold coinage exchange in the entire globe, people's ability to accumulate any kind that could be "spent" is limited.

  The market instability is not the issue.  The issue is the debt of the United States and Europe.  The U.S. will "pay " it's debt by having the FED print more money.  This will further inflate the currency of the U.S. and degrade the value of any assets or wealth denominated in dollars.  The smart money is simply buying gold to avoid the impending currency inflation disaster that is going to happen probably within the next 12 months. 

So again, not accumulating as a currency. It's being used as a hedge, not an alternative currency.

Keep the gold and silver you have and buy more if you can.

Interesting, considering silver has tanked since last week. Almost complete divergence from gold. Wonder why.

 

Like anything, you should analyze your position and your other investments relative to this investment, and make sure these investments pursue your goals. There's nothing wrong with being aware that gold has weaknesses. Gold could completely collapse for no other reason than the "feeling" of investors turns against it. It's happened before, just 30 years ago.

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