Treasuries Are Not Risk-Free
Markets may finally be starting to share our view that Treasuries will fall and gold will rise despite financial asset deflation. As you can see from the following link, Citigroup is now calling for a bear market in Treasuries.
Looking back to 2008, investors sold what they thought were risky assets - stocks, private bonds (corporates, mortgages, structured products) and real estate. With the proceeds, capital moved into what were perceived to be risk-free assets - Treasuries and gold. Gold is the true safe-haven whereas Treasuries are just another risky asset.
People try to defend treasuries by saying the US will never default because the government can always print money. However, just making that statement acknowledges that there could be risk of a United States Government default. Thus, government bonds should not be AAA rated nor are they risk-free assets.
During 2008, as stated earlier, money flowed to Treasuries because of their perceived safety. This was despite clear credit deterioration. Our government's tax revenues are falling because of the recession/depression, while the government's balance sheet is deteriorating as borrowing increases to support bailouts and stimulus. If a family or a business lost revenue/income and/or took on more debt, its credit score would be hurt and cost of borrowing would rise. This is what should have happened to the US Government in 2008.
As can be seen in the following link, Spain, a major developed country, recently lost its AAA rating. This means that the market is being forced to recognize that government bonds are not as safe as an asset like gold. This explains gold's recent move higher despite recent strength in the dollar. ALL citizens around the world should be buying gold, as they need protection from government defaults and inflationary stimulus policies.
As government bonds fall in price, interest rates will rise in this country. This will create even greater stress on our broken economy. This will put downward pressure on risky assets, sending stocks, bonds and real estate lower while inflating the least risky assets. Rather than capital flows being split between government bonds and gold, gold will be the beneficiary sending it to prices that are currently unimaginable.
As always, we welcome comments/questions.