Gold vs Bonds, Which Direction Should You Take for Safety?

Has your financial planner been trying to get you to invest in sovereign bonds from various countries?

The problem with many sovereign bonds today is that an enormous percentage of them come with negative yields, meaning that you pay the often troubled sovereign country for the privilege to use your money.

This is supposed to be a favorite safe place to park your hard earned cash. But is it really so safe to lend your money to troubled sovereign countries like Japan and the various countries of the European Union?

Consider why these bonds deliver negative yields in the first place. How did it come to pass that sovereign countries can require you to pay them to utilize your money?

Former Federal Reserve Chairman Alan Greenspan would have you to believe it is because of competition.

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His thoughts on the matter: “Whenever you see strong currencies in a normal market, they’re spread against say Spain and Italy’s 10-year notes, it’s relatively stable through time. But as the rates overall go down, clearly at some point as the rates go down you’re going to pick up negative rates for the highest-quality currencies – like of course the Swiss franc – and I think that this is just a passing fancy.”

Greenspan can call it like he sees it, but does this justify you putting your hard earned investment dollars into vehicles in which you pay to participate?

The Real Reason So Much Sovereign Debt Pays Negative Yields

The numbers of negative debt yielding sovereign bonds that you see offered today are truly eye watering.

Two years ago almost none existed. In February of 2015, the entire amount of global debt with negative yields amounted to a “mere” $3.6 trillion. One year later by February of 2016 this amount had practically doubled to reach $7 trillion. Less than a month ago, it reached $11.7 trillion. Now it has achieved a staggering total of over
$13 trillion
per last week’s published calculations of Bank of America Merrill Lynch.

That now exceeds 50% of all government debt issued on the planet! If this is just a temporary new normal that Greenspan believes, then why is the trend of negative sovereign debt continuing to double in ever shorter time frames?
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The answer is not one which will inspire confidence in you. The Bank of Japan and European Central Bank have been increasingly engaged in massive quantitative easing. In an effort to jump start failed Japanese and continental European economies back to growth, these central banks have been throwing everything including the kitchen sink at their economies.

These central banks are busily printing money (debasing their currencies) and using this money to buy up sovereign and even corporate debts now in an effort to prop up the markets. The governments then take these extra proceeds to use as spending money to try to boost production and GDP within their own sinking economies.

The byproduct of this activity to bolster sagging and even stagnant economies results in falling government sovereign bond yields. More printed up money demand for these securities leads to ever lower and lower yields.

So in the vast majority of cases, sub-zero sovereign bond yields do not represent higher quality, no-risk government bonds at all as Greenspan would have you to believe. Instead, they reveal the nations
that are struggling the most.

Think about it, and it makes perfect sense. Japan has been caught in a downward deflationary stagnation spiral for more than two decades now. They continue to throw money at their bond markets and banks in an effort to increase economic activity.

Yet after years of doing this, the economy has not at all improved. Do you really consider Japanese sovereign debt
tied to an economy that has not materially grown in nearly twenty-five years to be safe haven
debt?

Look at the EU and its national countries’ sovereign debt. This largest economic block in the world has not yet reached its former GDP and growth levels seen just before the financial crisis erupted in 2007/2008. This is more than five years after the crisis officially ended!

You might be able to make a case that sovereign bonds from countries such as Norway, Switzerland, and Sweden are more likely to be safe haven places to park your investment dollars. Yet if things are so rosy in these countries, why do they need to issue government debt at all?

The answer is that there is no such a thing as safe haven positive yielding sovereign government debt. Gold is your safe haven destination of choice.

No government can print or effectively manipulate gold. While it may not pay a yield, at least you do not have to pay anyone to keep your money invested in it.

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  1. I always liked the idea of investing in gold. However, I’ve read some articles which suggests that investing in bonds are much safer than investing in gold. I do not necessarily fancy investing in bonds, but even if I wanted to invest in gold, I don’t know how to go about it. 

    • Hi Louis,

      As I told others, you can request for the free investment kit so you can understand how it works and make an informed decision.

      Happy investing

  2. Hi Olufemi, your article gave me a vivid explanation of what bonds is truly is. I cant imagine paying any sovereign country whether troubled or not to use my own hard earned money, which is actually a privilege on their own part. To be honest, lending money to any troubled sovereign country is dangerous already not to talk of paying them for the privilege of handling my money, that simply amounts to negative yields.

    I don’t know why I have so much liking for gold, with gold you are assured that your investment is intact, even if it does not often yield dividend.

  3. Actually I have no idea over what this post is talking about but I think i do have a colleague who spends his time on bond, I will refer him to your site for more insight and to see if the informations here would be of great help to him, he loves anything of Gold and I think this post will help no doubt 

  4. Idon’t
    think there is need for one to invest his hard earned money in bonds since the sovereign countries backs it up with negativity. It’s not just worth investing into it if you ask me. How does profit rise from such investments. I think investing in gold is preferable because gold is universally accepted and it’s price does not depreciate so much.

  5. Hmmm. This is informative and thought-provoking. This is what is called padding the economy. I appreciate your analysis and I agree with you completely. It is worrying the ways and manners most governments run their country economy. Printing of currencies to augment a failing economy is a bad choice with attendant consequences. Many governments are into this strange and counterproductive practice. Gold is a better choice compared to bonds, it cannot be manipulated. 

  6. From my knowledge of basic economics, it doesn’t make real economic sense to print excess currency with the hopes of getting the economy going. When a nation’s economy is sinking, there are other fiscal and monetary policies that they can adapt to get things stabilized in the meantime.

    The value of any country’s currency should be commensurate to the value of gold in its reserve. I learned this is high school economics. It only makes sense to invest in gold, because unlike any other form of financial investment product, its value does not fluctuate so broadly with the economy. 

    Does investing in gold mean buying a physical chunk of the commodity and storing it in some banks? Or what are some reliable companies that one can invest in from any part of the globe?

    • Yes it is physical Gold you can touch but it will be stored for you and insured. You can request for an investment kit for more information.

  7. This is a thorough review of gold and bonds. I must commend you for taking your time to share this review because you must have done a lot of research and reading this article I understood every bit of sovereign debt, although I have little knowledge on this before but this article has wifen my scope on it. Thanks for sharing this information.

  8. I really want to commend you for taking out time to write this review about gold versus bond. I will love to add that Bonds are a debt security under which the issuer owes the holders a debt, depending on the terms of the bond, is obliged to pay them interest, and repay the principal at a later date. Also, the volatility of bonds (especially medium dated and short bonds) is lower than that of equities ( stocks ). So you see, bonds are generally viewed as safer investments.

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