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Posts Tagged ‘bonds’

When markets tank, investors start looking to re-distribute their capital allocations…unloading high-risk and medium-risk  assets in favor of low-risk investments…because the risk premium just collapsed.

And just when that’s happening, the government is looking at reducing spending and therefore cutting into bond sales, reducing supply for one of the best risk-free options on the table.  That will will cut into yields, which will in turn cut into private investment cash flows.

And wouldn’t that reduce the floor under the risk premium?  I think so.  Gold, by the way, becomes a dangerous option when liquidity dries up in the face of demand.  As long as people are buying into gold in order to hold it, and doing so faster than the rate of supply, the price will continue to grow…but the volume of the actual gold market will decline.  As liquidity declines, price volatility tends to increase (because relative supply and demand compresses…this tends to increase the impacts of price shifts).  If this is driven by growing problems in other potential assets, as soon as those other assets stabilize, investors will exit gold.

That will undercut the price, potentially drastically.

Bear in mind that gold is a poor investment, generally, for a very simple reason: it offers no cash flow.  It is poor as capital.  I’m not saying don’t use it as an investment hedge; do that, please!  It is a way to hedge against outside factors impacting the value of currencies, for instance.  However, as a straight-up capital or financial investment, its fundamentals are poor in a healthy economy, as it produces no cash flow.

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