Gold vs. U.S. Treasuries – Which is the True Safe Haven?

The decision of FOMC to purchase $400 billion worth of Long Term Securities by selling Short Term Securities by the end of June 2012, may have triggered a sharp reaction in the financial markets that turned into a sharp drop in commodities prices, including gold price, a sharp appreciation in USD, and a decrease in US stock markets and US Long Term Securities.

The recent shift in the direction of gold price raised the old debate among traders: which investment is more reliable to act as a Safe Haven – gold or U.S. Treasuries? And what are the merits for holding each of them?

A commenter on the site resurfaced this issue and I think it calls for a close look at the two investment tools and try and compare their relation and list the advantages of each investment over the other (Thanks Jlmuza for your comment and idea).

U.S. Treasuries / Gold Price – September

During September, the U.S. 10-year Treasury yield has shed 0.51 percent points of its rate. The main spike came in the past few days perhaps over the concern of Greek debt default. The FOMC announcement only further accelerated the process as traders showed their discontent with the current instability in the financial markets and with the modest plan of the Fed.

Chart Gold Price and 10 Yr Daily Treasury Yield September 2011 September 23

Gold price also changed direction and started a downward trend from September 15th that only strengthened in the past couple of days.

Currently, gold price is traded at $1,666 well below the near $1,900 mark it had reached at the beginning of the month. But at the same time long term Treasuries yields have reached yesterday their lowest levels ever (e.g. 10 year Securities yield reached 1.72%). So are these investments rivals or complementary products?

The Relation between U.S. Treasuries and Gold Price

The relation between the two investments tools is complicated: one the one hand they are both perceived as “safe haven investments”. In recent months they have even had a strong negative correlation (see chart below): as gold price inclined, the yields on long term Treasuries dropped. On the other hand, at the beginning of the year they had a positive correlation so that as the yields on US securities declined, gold price also fell.

Correlation Gold Price and 10 Yr Daily Treasury Yield September 2011 September 23

U.S. Treasuries / Gold Price – 2011

During 2011, gold price and 10-year treasury yield (I use it as a representative of the long term treasuries) didn’t change sharply until July when the trend shifted for both investments: gold price sharply inclined and 10-year treasury yield steeply declined over the concerns of global slowdown, US debt ceiling problem and Europe’s debt crisis.

Chart Gold Price and 10 Yr Daily Treasury Yield  FEB 2011 September 2011 September 23

The above mentions shows that gold and US treasuries are related to a certain extent, but does it mean they are both equally safe haven investments?

So let’s break down the major pros for each investment in respect to the other:

Pros for Gold

  • The long term yields are still high and perhaps the recent plan that Bernanke came up in the recent FOMC meeting might twist the long terms yields downward.
  • There is high demand (mainly in Asia) for gold that could further incline in the years to come; since this precious metal is limited there is a potential growth in price.
  • In case of an increase in inflation pressures in the major economies such as US or a sharp deprecation of USD, gold might better serve as a protection against such catastrophes.

Pro for LT Treasuries

  • In regards to volatility, both investments had sharp shifts during the year, but with gold there is a potential loss if gold price drops below the level you had bought it, while in Long Term securities this is moot.

Standard deviation Gold price forecast 10 Yr Daily Treasury Yield  april 2011 September 2011 September 23

  • In US treasuries there is a yield that you receive, while in gold there is no yield.
  •  There is a cost for holding gold, and the hike on margin requirement by the CME during August and September may have also affected some speculators to shift away from the bullion market.

In conclusion, there is no clear winner in regards to which is a better investment. That is something each trader should consider based on his/hers risk preference; in regards to “safe haven” there pros an cons for each investment, but the bottom line is if you wish to insure against highly unlikely adverse scenarios (and take into account that much like insurance, you may not “cash in”) you should lean towards gold, otherwise perhaps LT securities should be more considered as a safe haven investment; and of course there is always the option of diversifying.


 For further reading:

Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.  


This is by no means an investment advice only market analysis; please see here full disclaimer.