Own Some Gold and Avoid Overvalued Assets

The comments below are an edited and abridged synopsis of an article by Mark O’Byrne

The cost to the US government of borrowing money for a decade approached 3% last week. If the US 10-year Treasury yield breaches 3%, it will be at a level not seen since 2013.

If bond yields are turning up (having reached unprecedentedly low levels), what does that imply? There are 3 main options.

One: The US Treasury bumps against the 3% mark again, falls back down, and there is a recession before any of this can become an issue. The US falls back into the deflationary pit (unlikely).

Two: Yields rise above 3% but it will be okay; productivity will improve. Technology leads to the sunny place where workers and robots labouring together in harmony creates a more efficient, more profitable workplace. Everyone gets higher pay raises, and inflation rises just enough to take the edge off of debts, but not enough to make anyone miserable. A new golden age.

Three: Yields rise above 3% because commodity prices are rising fast. They’re rising because globalization is being unwound. Wages start rising too, but not because companies have more profits. Instead, it’s because voters are fed up with slow-rising wages and fast-rising asset prices. So asset prices crash, and certain groups of workers (the most politically sensitive) get pay hikes, while those on the margins get laid off.

O’Byrne’s advice: Avoid what’s overvalued and own some gold.