Kelsey Williams

Treasury Bond Market Outflows, ChatBot, & Credit Collapse

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TREASURY BOND MARKET OUTFLOWS

A reader of mine who is a financial professional and educator asked about something he heard regarding flow of funds out of U.S. Treasury bonds and into other countries’ government bonds. Reference was made to Europe generally, and Germany specifically. We both wondered about the attraction of other government bonds for investors compared to U.S. Treasury bonds.

Rather than starting my own global search for facts and information, I decided to try something with AI. I assumed it would be faster. It was. It was also lengthy. Below is the complete text of my conversation with ChatBot. My prompts and ChatBot’s responses are identified in bold type. All text from ChatBox is in italics. ChatBox sources include JP Morgan, Schwab, Morgan Stanley, US Bank, Union Bank of Switzerland, Treasury.gov, and Morningstar.

I provide my thoughts and commentary at the end of the conversation…

Kelsey’s Gold Facts: Please explain clearly what is happening and where funds from the sale of U.S. Treasury bonds are being moved. I have heard that one destination might be German bonds (bunds). Is this correct? Or just inflamed speculation? Any other countries?

ChatBox: The current market for U.S. Treasury bonds is experiencing unusual dynamics, with yields rising during economic uncertainty, contrary to their historical role as a safe-haven asset. As confidence in U.S. Treasuries and the dollar wanes, investors are looking for alternative investments. However, there is limited direct information on whether funds from the sale of U.S. Treasury bonds are being moved specifically to German bonds or other countries’ bonds.

Funds from U.S. Treasury bonds could be moving into various asset classes as investors seek safer or more lucrative options:

  • Gold as a Safe Haven: With the instability in Treasuries, gold has seen an increase in value, becoming a more attractive store of value

  • Other Fixed-Income Assets: Investors may be turning to other fixed-income securities, potentially including bonds from stable economies.

Regarding German bonds specifically, there is no direct evidence indicating they are a primary destination for funds withdrawn from U.S. Treasuries. However, European bonds, in general, could be attractive due to their stability and relatively low risk compared to volatile assets.

Historically, countries like China have been significant buyers of U.S. Treasury securities for stability and to manage their forex reserves . However, concerns about the reliability of U.S. Treasuries and potential geopolitical tensions have led to decreased foreign demand, which could lead to a shift in investments.

While there is no clear evidence pointing to German bonds as a specific destination, funds could be moving into:

  • European Debt: Investors might consider European bonds due to their relative stability.
  • Gold and Other Commodities: These have gained attractiveness as safe-haven assets.
  • Other Safe-Haven Currencies and Assets: Such as the euro, if not heavily impacted by European economic instability.
Kelsey’s Gold Facts: What are the fundamental reasons that would make any other government bonds more attractive than U.S. Treasury bonds?
ChatBox: Several fundamental reasons could make other government bonds more attractive than U.S. Treasury bonds, particularly during periods of economic uncertainty or shifting investor sentiment. Here are some of the key factors: 
  • Central Bank Policies: Monetary policies in other countries, such as lower interest rates or quantitative easing, could lead to attractive bond yields compared to U.S. Treasuries. 
  • Higher Yields: If other government bonds offer higher yields than U.S. Treasuries, they can become more attractive to investors seeking better returns on their investments.
  • Sovereign Ratings: A government with a strong credit rating and low risk of default can attract investors. If a country’s economic outlook improves, its bonds may seem more secure than U.S. Treasuries, especially if the U.S. faces fiscal issues.
  • Stable Economic Environment: Countries with stable political and economic environments may be favored over those perceived as higher risk.
  • Currency Strength: Investors might seek exposure to a stable or strengthening currency. If the US dollar is expected to weaken, foreign bonds may become more attractive. 
  • Inflation Rates: If a country’s inflation rate is lower than that of the U.S., its bonds may offer better real returns. Investors often seek to preserve purchasing power through fixed income.  
  • Diversification: Investors might diversify their portfolios by including bonds from different countries as a hedge against economic instability in the U.S.
  • Market Sentiment: Geopolitical tensions or financial crises in the U.S. could lead investors to seek safer or more appealing bonds elsewhere.  
  • Liquidity Preferences: Some investors may prioritize market liquidity. If bonds from other countries are readily tradable and liquid, they may be more attractive than less liquid Treasury securities.
  • Political Stability: In times of U.S. political uncertainty or instability, foreign governments perceived as more stable may gain traction, leading to increased demand for their bonds.
  • Trade Agreements and Alliances: Bonds from countries involved in supportive trade arrangements may attract investors seeking economic stability.
  • Tax Treatments: Certain government bonds may offer more favorable tax treatments than U.S. Treasuries, appealing to investors sensitive to tax impacts on their returns.
  • Regulatory Landscape: A favorable regulatory environment in another country could attract investment if it enables better growth prospects and less risk.
  • Potential for Growth: Emerging markets may offer greater potential for growth, albeit with higher risks. Bonds from these markets could attract investors looking for higher returns despite the associated risks.

In summary, the attractiveness of government bonds from other countries compared to U.S. Treasury bonds can depend on a complex interplay of factors including yields, credit risk, inflation, market conditions, geopolitical stability, and the economic environment. Each investor’s risk tolerance and investment strategy will influence these preferences.

Kelsey’s Gold Facts: Your responses are theoretical and suppositional in nature. Can you site any specific instances where these factors are currently in play?
ChatBox: Currently, there are several factors influencing the attractiveness of government bonds, including fluctuations in interest rates and yield dynamics. While specific instances where funds are moving from U.S. Treasury bonds to other countries’ bonds, such as German bonds, are not well-documented, some trends and shifts in the bond market can be identified.

  • Higher Yields and Volatility: In recent months, global government bond yields have experienced notable increases. For instance, the U.S. 10-year Treasury yield rose significantly in December 2024, while Germany’s 10-year yield also climbed. This volatility makes other government bonds potentially more attractive if they offer better yields or stability.

  • European Bond Market Performance: European bond markets, including those of Germany and the U.K., have seen favorable performance relative to U.S. Treasuries in 2024. This suggests that investors may find these markets more appealing due to their historical stability and current yield dynamics.

  • Diversification and Global Outlook: As global economic conditions shift, diversification across asset classes and geographies is becoming more attractive. Regions like Europe and Asia are experiencing rallies in their equity markets, driven by sentiment changes and valuation adjustments. This trend could spill over into bond markets as well.

While there is no explicit evidence of a direct shift from U.S. Treasuries to German bonds or similar alternatives, investors are increasingly focused on diversification. This includes moving funds into other developed country bonds where yields are higher or more stable than those offered by U.S. Treasuries.

In terms of specific factors driving investment decisions, higher yields in some markets and concerns about economic stability and inflation in the U.S. are key considerations. The prospect of the U.S. Federal Reserve maintaining higher interest rates longer than anticipated limits the potential for significant drops in Treasury yields, which could further encourage investors to explore other options.

Overall, while direct evidence of mass shifts from U.S. Treasuries to specific alternative government bonds is limited, market dynamics suggest that investors are exploring safer or higher-yielding investments globally. 

Kelsey’s Gold Facts: If investors are seeking higher yields and stability, which is in line with the “prospect of U.S. Federal Reserve maintaining higher interest rates for longer than anticipated”, why would they be “further encouraged to explore other options”?
ChatBox: The statement regarding investors being encouraged to explore other options amid the prospect of the U.S. Federal Reserve maintaining higher interest rates for an extended period may initially seem contradictory. However, several factors can help clarify this dynamic:
Comparative Yield: If U.S. Treasury rates are not rising as quickly as those in other countries, the opportunity cost for holding Treasuries increases. Investors may find more attractive yields elsewhere, prompting them to shift their investments despite the Fed’s rate decisions.
  • Real Returns: If inflation is high, even higher nominal interest rates from the Fed may not be sufficient to provide positive real returns for Treasuries. If investors expect inflation to erode the value of their holdings, they may look for other instruments, including foreign bonds or commodities, that can offer better protection against inflation.
  • Currency Strength: Investors might seek exposure to a stable or strengthening currency. If the US dollar is expected to weaken, foreign bonds may become more attractive. 
  • Inflation Rates: If a country’s inflation rate is lower than that of the U.S., its bonds may offer better real returns. Investors often seek to preserve purchasing power throu
  • Comparative Yield: If U.S. Treasury rates are not rising as quickly as those in other countries, the opportunity cost for holding Treasuries increases. Investors may find more attractive yields elsewhere, prompting them to shift their investments despite the Fed’s rate decisions.
  • Diversification Strategy: In uncertain economic times, investors often seek to diversify their portfolios across different geographies and asset classes to manage risk. If they perceive other government bonds as offering more stability or favorable economic conditions, they may allocate funds there while still holding some U.S. Treasuries.
  • Shifts in Sentiment: Investor sentiment can influence the demand for U.S. Treasuries. If sentiment turns negative toward the U.S. economy or fiscal health, investors might pivot to perceived safer asset classes in other countries, despite the Fed’s rate policies. The bond market’s behavior is often sensitive to news and macroeconomic indicators.
  • Propagation of Trends: As investors begin to move toward other markets for higher yields, this behavior can create a self-fulfilling prophecy. Increased demand for foreign bonds can also lead to tightening spreads and lower yields in those markets, making them relatively more attractive over time.
  • Strategic Allocations: Some investors may take a longer-term view and anticipate changes in economic conditions, such as potential recessions or shifts in monetary policy. They may opt for bonds in countries with a more favorable long-term outlook, even if the current rates in the U.S. seem high.

In summary, while U.S. interest rates might be elevated compared to historical lows, the broader economic context, including factors like inflation, risk perceptions, and the global economic outlook, can encourage investors to seek higher yields and stability in other countries’ bonds. This inclination is further influenced by market dynamics and the desire for portfolio diversification.

Kelsey’s Gold Facts: What are current nominal yields on government bonds from other countries compared to the U.S.?
ChatBox: As of mid-April 2025, here is a comparison of nominal yields on 10-year government bonds from the U.S. and several other key countries:
Country 10-Year Government Bond Yield (Approx.)
United States 4.34%
Germany Around 3.5% – 4.0% (recently climbed by ~28 bps in late 2024)
United Kingdom Slightly below U.S. levels, yields increased by ~33 bps in late 2024, generally in the 3.8%–4.3% range
Canada Similar to Germany, with yields performing well relative to U.S. Treasuries in 2024, near 3.5% to 4.0%
Mexico Higher yields, up by ~42 bps in late 2024, reflecting emerging market risk premiums, generally above 7%
Brazil Substantially higher yields, with a jump of 175 bps in late 2024, often above 8%
China Yields declined by ~36 bps in late 2024, generally lower, around 3% or below in many tenors
Thailand Slight decline by ~4 bps in late 2024, yields generally below 3%
  • U.S. Treasury 10-year yield is about 4.34% with an inverted yield curve (long-term yields lower than short-term yield of 3.86% for 2-year bonds) indicating caution about the long-term economic outlook.
  • German and Canadian bonds have yielded in the 3.5–4.0% range recently and have performed well relative to U.S. Treasuries, making them somewhat appealing alternatives in developed markets.
  • The U.K. gilt market offers yields slightly below or close to those of U.S. Treasuries, boosted by recent increases, making it an interesting option given comparable growth prospects.
  • Emerging market bonds (Mexico, Brazil) offer significantly higher yields, reflecting higher risk and inflation premiums, but are affected by currency volatility and risk appetite.
  • China and Thailand bonds generally have lower yields but have experienced recent declines, signaling different monetary and inflation dynamics in Asia.

In summary, U.S. Treasury yields at around 4.3% remain competitive but do not necessarily dominate yield offerings globally. European government bonds like German bunds and Canadian bonds offer slightly lower but still attractive yields with strong credit quality, while emerging markets present higher yields with increased risk. This yield landscape helps explain why some investors may look beyond U.S. Treasuries for diversification and yield enhancement.

Kelsey’s Gold Facts: Can you cite any evidence which identifies clearly any country or government that issues bonds that are currently more attractive than U.S. Treasury bonds?
ChatBox: Currently, while no single government bond market clearly outperforms U.S. Treasury bonds across both yield and safety, investors are considering alternatives that offer competitive yields and perceived stability. The U.S. Treasury 10-year yield is around 4.34%, and other developed markets are offering yields that are either comparable or slightly lower but with stability benefits.
Country 10-Year Government Bond Yield (Approx.) Credit Rating
United States 4.34% AAA
Germany Around 3.5% – 4.0% AAA
United Kingdom 3.8% – 4.3% AA
Canada Near 3.5% to 4.0% AAA
China Below 3% A (S&P)
Thailand Below 3% A (S&P)

Several factors make certain government bonds attractive alternatives:

  • Germany and Canada: These countries offer yields that are competitive with U.S. Treasuries and have performed well in 2024 relative to the U.S. market. Their stability and creditworthiness make them appealing for risk-averse investors.

  • United Kingdom: The U.K.’s gilt market is interesting due to its yields being closer to those of the U.S., while facing similar growth challenges as the eurozone. This presents an opportunity for investors seeking yield without drastic currency risk compared to the euro.

  • Emerging Markets: Countries like Mexico and Brazil offer significantly higher yields, though these come with higher risks and inflation pressures. These markets may attract investors willing to take on more risk for higher potential returns.

In summary, while U.S. Treasury bonds remain strong in terms of safety and liquidity, other markets like Germany, Canada, and the U.K. offer competitive yields with stability, making them attractive for diversification and yield enhancement strategies. Emerging markets provide higher yields but with increased risk. (End Of Conversation)

SUMMARY  

ChatBot has provided lots of information and presented logical-sounding arguments in favor of other countries’ government bonds as alternatives to U.S. Treasury bonds. The logic, however, is flawed due to circular reasoning and faulty assumptions.

It tends to provide theoretical assumptions as evidence but cannot provide any material facts or information in answer to my simple prompts. My overall impression is that rather than responding with an answer to the prompt, it tries to impress with an overload of information that does not answer the question. It feels like what you might expect from most politicians at a debate.

Some specific examples of concern are 1) ChatBot’s answer to my prompt about investors seeking higher yield and stability and 2) the answer to my prompt re: other government bonds that might be more attractive. In both cases, ChatBot failed to provide any consistent corroboration of its earlier statements which had prompted my questions.

Finally, ChatBot claims “other developed markets are offering yields that are either comparable (to U.S. Treasuries) or slightly lower but with stability benefits”. I’m not sure what is meant by “stability benefits” of the other countries in the table (see above) as compared to U.S. Treasury bonds. The implication is that stability is compensation for those countries lower bond yields when compared to U.S. Treasury bonds.

Yet, U.S. Treasury bonds have the highest yield and the highest credit rating of all the government bonds listed. So, why look elsewhere?

There seems to be no available evidence to support conjecture about specific destinations, including German bonds, for the outflow of funds from the U.S. Treasury bond market.

FINAL THOUGHTS 

As investors seek shelter from the financial storm, they will  look for alternatives. It is absurd to think, however, that other governments’ bonds or currencies are potential alternatives to U.S. Treasury bonds or the dollar. If the credit market collapses, everyone will feel the pain.

If the U.S. dollar collapses, other currencies won’t survive. All fiat would go up in smoke.

Holding German Bunds or other fiat currency-denominated investments won’t provide a better or safer alternative. Like it or not, bruised and battered, the U.S. dollar is still the currency of last resort. (also see Treasury Bonds – Last Week’s Big Winner; This Week’s Big Loser)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

U.S. Treasury Bonds – Last Week’s Big Winner; This Week’s Big Loser

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 U.S. Treasury Bonds turned about face and dropped more than 3% in Monday’s trading. The huge reversal and decline wiped out all of last week’s increase which I referred to in my previous article…

“…the big winner, both relatively speaking (compared to everything else) and in absolute terms. Bond prices began rising sharply as early as Monday afternoon and finished the week with peak prices up 4% around mid-day on Friday.” 

By mid-day Wednesday, U.S. Treasury bonds were down more than 8% from their peak level last Friday. Then, in order to thoroughly confuse everyone, bond prices rallied sharply by more than 3%, closing the trading day with a small gain.

What is going on in the bond market? Before trying to answer that question, let’s look at a chart (bigcharts.marketwatch.com) of TLT (iShares Long-term Treasury Bond ETF)…

The sharp increase in bond prices actually began on Friday, March 28th. The total increase from Friday (28th) to Friday (4th) was more than 5%. If you are the least bit familiar with bond prices, you know that that is a big deal.

Given the panic state of most other markets last week, it seemed reasonable to attribute bond market strength to the oft-cited “flight to safety”. That may be so, but how does one explain such a swift reversal as that which occurred Monday? The question requires more than a superficial answer since stocks, while quite volatile, did not provide any signs that investors were in a rush to get back in the pool.

Then Wednesday happened. With President Trump’s forbearance on implementation of the latest tariffs, everything (stocks, gold and gold stocks, silver, and bonds) went up.

A strong up move in stocks on high volume would be reasonably supportive of arguments that last week’s action in the markets was a one-off and that the flight to safety was over. Stocks did not provide that signal Monday. If investors are now convinced that the ‘all clear” signal has been given, why did bonds suddenly rally today. Are bond investors confidently expecting lower interest rates?

BOND MARKET BACKTALK

Right from the outset of the Fed’s policy change re: interest rates last September, the bond market failed to confirm that rates were headed lower.  Here is a statement from my article Backtalk From The Bond Market published in January 2025…
“U.S. Treasury bond prices have now declined 16% since the Fed announced a reversal in its interest rate policy and the first rate cut last September. The latest weakness comes in the face of a second rate cut, so it begs a repeat of the question I posed last October…
“Why are bond rates rising at the very time the Fed is trying to move interest rates lower?” (Fed Cuts Rates But Bond Rates Are RISING)” 
Funny thing is that bond prices then began rising in mid-January. The correspondingly lower interest rates seemed to put the bond market back in the Fed’s camp. Last week’s strong action was the culmination of three months of higher bond prices. You can see this on the chart below…

After looking further at the chart immediately above, one might conclude that bond prices have peaked on an intermediate basis. That next move lower could come with another broad selloff in stocks and other assets. In that context, maybe today’s reversal to the upside isn’t significant. Time will tell.

Let’s look at one more chart…

The bond market has been declining for five years since 2020. Whether you view the action in the bond market for the past two weeks or for the past few months, in the long-term perspective illustrated in the chart just above, it is difficult to see much that indicates hope for sustaining higher bond prices and correspondingly lower interest rates.

To the contrary, it is a graphic picture of Fed Chair Powell’s long standing proclamation that interest rates will remain higher for longer.

CONCLUSION 

Further declines in stocks might not provide the fuel for higher bond prices. The flight-to-safety argument could be inapplicable.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Market Madness – Top Seeds Eliminated

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Market Madness trumps March Madness for now. Here is a recap of the latest action…

FIRST ROUND SURPRISES 

Stocks: Some are surprised at this; some are not. The major averages are down 11-12% over the past two days alone. That might not seem so bad, but generally, investors were likely not expecting another bath at this time. The loss was especially hurtful for the tech-heavy NASDAQ. Cumulative losses for the volatile index since mid-February are -23%.

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A Comprehensive Overview of Tariffs

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WHAT IS A TARIFF?

At its core, a tariff is a tax levied by a government on goods and services imported into the country. The primary purpose of tariffs is to generate revenue for the government.  Tariffs are sometimes used with the intention to protect domestic industries from foreign competition by making imported goods more expensive. This protectionist strategy aims to encourage consumers to buy locally-produced products, ultimately bolstering the national economy.

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Is Inflation Necessary?

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IS INFLATION NECESSARY?

The straight answer is “no”. The clarity of my emphasis is prompted by a friend’s reaction to my previous article “No Winners When The Inflation Balloon Pops”.

In the article, I said “A certain amount of inflation is necessary to keep things from cascading downward.” My friend exclaimed quite vociferously that “INFLATION IS NEVER NECESSARY!” He’s right. Both he and I shared similar concerns a number of years ago when one of our monetary heroes, Milton Friedman, made similar comments about the necessity of inflation. To us, it seemed like a cop out; and, it still does.

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Price vs Value – Will Gold Hit $3460?

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PRICE VS VALUE

Can you explain the difference between price and value? Most investors can’t. Neither can most analysts. A few years ago, some people were caught up in the NFT (non-fungible token) craze. Try explaining price and value as it applies to that former “next big thing”.

NFTs were part of the virtual reality sickness that seized upon investors and others, causing them to spend money for something that had little or no real value. Price volatility for the imaginary items, however, seemed to imply that owning a piece of the action was imperative. You didn’t need to be a creator of master level art in order to participate, either. The investor war cry was “buy and accumulate”; and they did. Special online sites for facilitating the creation of caricatures that resembled Lego Monkeys (among other obviously valuable subjects and genres) also provided a marketplace where buyers and sellers could exchange their wares and get rich. As the sickness worsened, prices rose out of sight exponentially.

Day-trading in stocks became passé. Collectors of NFTs tried valiantly to articulate the ‘value’ of these works of art by referring to them as “unique” and “one-of-a-kind”. Upon purchase and transfer, the new owner received certification that the piece was original and genuine. It could be part of a series and that notification was also included. No one else was authorized to display or show that particular token. Sometimes there might be a physical item attached to your purchase, and, ownership of that transferred as well. After watching a host of videos that tried to explain various aspects (creation, selling, collecting, etc.) of the virtual disease, I concluded that imagination and fantasy had become more valuable than reality. I laughingly tried my hand at it  and wrote an article about it (see Having Some Fun With NFTs). What is/was the value of an NFT? The website folded sometime afterwards as the sun set on the NFT craze.

DO CRYPTOCURRENCIES HAVE VALUE?

Not exactly. There is value, however, which is not vested in the individual token (Bitcoin, Ethereum, XRP, etc).

The primary fundamental value of all cryptocurrencies stems from the basic characteristic that is universal to cryptocurrencies. That characteristic is block chain technology which allows decentralized and private transfer of money between and among participants (buyers and sellers, investors, etc.). In other words, the value lies in the process, which happens absent a central clearing authority.

One of the most laughable, and outlandish, claims about Bitcoin, is that it is a store of value. There is absolutely no evidence that Bitcoin is a store of value. Whether the price is $100,000 or $1, nothing has changed other than its price. Its value lies in the private transfer of money, not the bitcoin itself. (see Bitcoin Has No Value; Neither Does Ethereum, XRP, Etc.)

THE VALUE OF GOLD

Fascination with the price of gold has investors expecting continually higher prices. Analysts and marketers alike chime in with all of the fundamental reasons to expect more of the same.

Gold’s value, however, is unrelated to its price. The value of gold lies in its use as money. As such, gold’s value is the same today as it has been historically for several thousand years.

A higher price for gold does not tell us anything about gold. Gold’s higher price over time is a reflection of the loss of purchasing power in the U.S. dollar.

The U.S. dollar has lost approximately 75% of its purchasing power since 1980. What this means is that it costs about four times as much today for comparable goods and services as it did in 1980.

In order for the gold price to fully reflect the loss in USD purchasing power, it would need to be $3460 oz. today. As it is, gold is priced at $3030 oz.; more than $400 oz. cheaper than its inflation-adjusted high in 1980.

CONCLUSION 

Will gold reach $3460? It’s possible. A 14% surge from here would do it. What happens afterwards is open to speculation.

In the past, the gold price has declined significantly for long periods of time after approaching its previous inflation-adjusted peaks. This happened in 1980, 2011, and again in 2020. Let’s see what happens this time. (also see Gold’s Singular Role)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Gold Stocks – Fantasy Vs Reality

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GOLD STOCKS – FANTASY 

“There is more money to be made in gold stocks compared to gold because gold stocks benefit from a leverage factor that potentially produces gains more favorable than holding gold itself.” 

At the end of 2023, the cost to mine gold was estimated at $1342 oz. (World Gold Council, Tomlinson; 16May2024). With gold at the time somewhere near $1950 oz., the implied gross margin was $600 per ounce. As the gold price rises, it is assumed that the mining costs would remain relatively stable, or at least rise more slowly, and not as much on a quantitative basis.

Hence, further increases in the gold price would translate to higher proportionate gains to the mining company on future gold sales. At $255o oz., the expected margin increases to $1200 per ounce. In other words, as the price of gold increases, the margin per ounce continues to rise, thus increasing potential profits.

In the above example, a doubling of the profit margin ($600-1200 oz) might be expected to fuel higher stock prices for mining companies that would far surpass the profits to be earned by investing in gold in its finished form and holding it for a relatively smaller gain of 30% ($600/$1950).

In addition, “because gold mining stocks are currently underpriced compared to gold bullion, the potential profits are even greater than might be expected otherwise”.

GOLD STOCKS – REALITY  

Below is a chart (source) which shows the month-end ratio of the NYSE Arca Gold Bugs Index (HUI) compared to the price of gold bullion back to 1996. The higher the ratio, the more favorable has been the performance of gold mining stocks; the smaller the ratio, the more favorable has been the performance of gold bullion…

HUI to Gold Ratio 1996-2025

In December of 2000, the gold price was at $271 oz. From that point over the next 3 years, the gold price increased to $406 oz., a gain of fifty percent. Gold stocks performed even better, rising six-fold over the same time period. The net out-performance of gold stocks is shown on the chart above with the gold stocks-to-gold ratio rising from .15 to more than .60.

Alas, that three-year period of super success for gold stocks compared to gold was followed by 22 years of declining performance, thus far. The current gold stocks-to-gold ratio is .11, just slightly above the .10 mark touched in 2024, and prior to that in 2015.

The reality of the decline in the ratio from .60 down to .10 is exacerbated by the fact that not only are gold stocks underperforming gold bullion on a long term basis, they are net losers over the past 14 years, even in the face of a sharply higher gold price. See the chart (source) below…

Since the peaks for both gold and gold stocks in 2011, the gold price has increased by more than 50% ($1900 – 2900); whereas, gold stock prices have declined by 50%. 

As far as gold stocks being undervalued relative to gold bullion, well… of course they are. If they continue to underperform so drastically as has been seen, then how could they not be undervalued?  Those who claim that gold stocks are undervalued mean that their prices have not gone up as much as expected, and, therefore, should increase substantially to make up for their failure to meet expectations. Good luck with that.

CONCLUSION 

There are a several reasons to not own or invest in gold stocks, except on a short-term, very speculative basis. They are underfunded operations (in most cases) subject to a host of external risk factors including labor strikes, shut downs, nationalization, etc. The biggest risk factor for most investors is the continuation of historical long-term underperformance, coupled with the risk of outperformance on the downside.

The biggest declines in gold stocks come when gold and/or stocks in general fall precipitously. That has been shown clearly with gold stocks versus gold 1980-2000; and with gold stocks versus stocks in general (most recently in 2020 and 2022).

Earlier this year, I included gold stocks on my list of five investments to avoid in 2025. The reason for that warning is that I believe the risks outweigh the potential rewards. I still do.

If anything has changed, it is that the risks are greater now than at the time (December 29, 2025) I wrote the article.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Prices To The Tariff Circus Continue To Rise

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In my article “Trade Tariffs – The Worst That Could Happen” this past December, I said the following:

“Tariffs are taxes imposed on imported goods, ostensibly to protect domestic industries or gain a competitive edge. They are usually recommended and promoted by those who think they have identified an “unfair advantage” existing between trade partners.

Trade tariffs harm small businesses and result in inefficient allocation of resources. Trade tariffs hinder productivity and economic growth; and, they can lead to trade wars. The end result is always higher costs for consumers. 

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No Winners When The Inflation Balloon Pops

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As the economy slowly grinds to a standstill, the expectations of worsening inflation continue to rise. “Stagflation”, you say? Possibly; but, there is another risk that is greater than stagflation. And, the prospects are much gloomier than those envisioned by a scenario which features an ordinary recession accompanied by marginally higher prices.

THE EFFECTS OF INFLATION 

Inflation is the debasement of money by government. As governments (via their central banks) create money by expanding the supply of money and credit, it cheapens the value of all the money in circulation and causes a loss of purchasing power in the currency (dollar, euro, etc.). The loss of purchasing power results in higher prices for goods and services.

All governments purposely inflate and destroy their own currencies. Over time, the inflation takes its toll and its effects are cumulative, volatile, and unpredictable. The Fed and other central banks think they can control (“manage”) the effects of the inflation which they create, but they end up spending most of their time reacting to and trying to contain those effects.

Today, the U.S. dollar is worth less than 1 penny compared to the dollar of a century ago. Theoretically, the dollar’s decline in purchasing power can continue indefinitely. Hence, some predict the inevitability of hyperinflation and complete repudiation of the dollar. (see Two Reasons Hyperinflation Is Unlikely)

RISK OF DEFLATION AND DEPRESSION 

There are dangers to the world economy which transcend those of hyperinflation and dollar destruction. Those dangers include wholesale deflation and a full-scale depression. The onset of deflation and depression could be triggered by a credit collapse. Or, we might continue to sink slowly and less obviously into a pit of financial quagmire. At some point, recognition of the awful reality would be obvious, but, too late for a reasoned response.

A certain amount of inflation is necessary to keep things from cascading downward. Over time, the effects of inflation are less obvious, so, additional money creation is required periodically in order to maintain the status quo. Beyond that, there is less of the stimulation that was intended. It is very similar to the vicious cycle of a drug addict.

The dependency on the drug (money) is heightened over time. The drug’s effects wear off more quickly and the dosage needs to be greater just to maintain stability, let alone get the desired effect as originally intended. The symptoms of withdrawal are often so bad as to prompt further addiction, rather than endure what is necessary stop the habit.

THE END OF INFLATION 

Historically speaking, periods of entrenched inflation always end in economic collapse. There are examples of ridiculously high inflation rates which ended up at dramatically lower levels after a collapse. And, the economic collapse can happen either with, or without, experiencing runaway inflation.

Weakening economic conditions and a stubbornly strong U.S. dollar are not indicative of worsening inflation. Credit market problems and liquidity issues shift the emphasis from the supply side (too much money) to the demand side (not enough money).

As the demand for cash increases, people begin to sell things – anything and everything. It will require a deflationary collapse to heal completely and to recover from the ill effects of Fed inflation over the past century.

Deflation means that the dollar would buy more, not less; however, there would be fewer dollars available. The demand for money would supplant the fears and concerns associated with the effects of inflation. (see The End Of Inflation?)

RISKS FOR INVESTORS 

It doesn’t matter much what you own at this point. If there is $ sign which indicates its value, that value will be significantly less (by 50% or more) in the event of a credit collapse and the onset of deflation. The biggest losses will come early; and they will be difficult to reverse.

In the past, quick response by the Fed has allowed for varying degrees of restoration and recovery. The long-term addiction described earlier has made it less likely that any Fed response to the next financial and economic catastrophe will offset the tidal wave of credit collapse and bankruptcies that ensue.

The popping of investors’ inflation-supported balloons (stocks, bonds, commodities, real estate, cryptocurrencies, etc) will be devastating.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Gold Headlines – Common Sense, Nonsense, And BS

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GOLD HEADLINES 

There are three headline news items which have attracted a significant amount of attention in the gold space lately. They are as follows: 1) gold “shortages” in London, 2) gold reserves at Fort Knox, and 3) revaluation of U.S. gold reserves. Both the headlines and the stories are rooted in fantasy and hyperbole. A more realistic take on them follows…

LONDON GOLD SHORTAGES

The news about transfers of gold held in London almost immediately turned into nonsense about shortages of the yellow metal. How so? Did the gold just disappear?

A little bit of digging (just a pun) by Ross Norman of Metals Daily offered a healthy dose of common sense to the unenlightened who were basking in their inappropriate fantasies about obscene gold price projections. Here is what Norman said…

“…so this is a logistical and conversion problem … fine ounces of gold are needed in one location (New York) > which needs to be converted into another form (in Switzerland) > and then shipped across the pond. Of course there are limitations on the Swiss refineries melting capacity to convert 400 ounce gold bars into the kilobars, as well as limitations on metal handling. Again … big deal. You’ve been in a car … temporary log-jams happen.

And if 435 tonnes of kilobars are now in New York then surely the problem is as much about surpluses on one side of the Atlantic, as much as so-called ‘shortages’ on the other. Taking the 10 year average, the US purchases only about 20 tonnes of physical gold bars each year – so 22 years worth of bullion bars have just washed up on their shores. Likely as not, like last time (covid), these bars will simply be flown home to London (via the Swiss refineries where they are converted back into standard bars) over the next few months. Nice business for some.”  

Read the entire article at metalsdaily.com

GOLD AT FORT KNOX 

For decades, people have been fascinated by the prospect that there might not be any gold stored at Fort Knox. Calls for an audit have been sounded often for more than fifty years.

An audit was performed in 1974 and various reports since then have certified the existence of the gold; yet, doubts remain.

The Sound Money Defense League says there has not been “a complete review of Fort Knox’s gold reserves…since the 1950s”.

The amount of gold supposedly stored at Fort Knox is approximately 8000 tonnes (metric ton). The total world gold supply amounts to 190,000 tonnes; although estimates vary widely.

In other words, the amount of gold (if it is there) held by the United States, represents about 4% of the total world supply of gold. That amount might seem small; however, the United States is still the country with the largest amount of gold reserves.

If an audit is conducted, we may not learn anything new. The gold stored at Fort Knox represents about half of U.S. gold reserves. If there is no gold at Fort Knox, it’s not a total loss. More important though, is that whether or not the gold is there and can be verified, any discrepancies at this point are likely well-discounted in the world market price for gold.

REVALUATION OF GOLD 

The term “revaluation of gold” is incorrect. What is meant involves a repricing of gold reserves held by the United States on its own balance sheet. Since 1971, the official price of gold as far as the United States is concerned, is $42.22 oz. Gold reserves shown on the balance sheet are listed at $42.22 oz., seriously underpricing gold reserves continuously for the past six decades. Why?

When former President Nixon terminated convertibility of dollars for gold at the officially agreed upon price, maintaining the official gold price of $42.22 was an attempt to save face. The United States government had inflated the U.S. dollar beyond any reasonable limits, and previous repricing efforts had not worked as intended. To reprice the gold would be official recognition of what everyone else already knew – the U.S. dollar was losing purchasing power at an alarming rate.

Without the promise of convertibility, the government could continue to inflate its currency without having to give up a valuable asset at a previously agreed upon cheaper price. Since that time, the global markets for gold determine its price, which is a reflection of the ongoing deterioration in the U.S. dollar.

Why is a “revaluation of U.S. gold reserves” such a focus of concern now? Here is where the BS comes in…

Treasury Secretary Bessent recently promised that the United States would monetize assets on the U.S. balance sheet. A repricing of gold reserves from the current $42.22 oz. to an actual market price of $2900 oz. would increase the $value of the gold reserves from about $11 billion to as much as $765 billion. Some have said that such a move would result in an increase of $750 billion for the Treasury. No.

The gold already exists; presumably. The world gold price already tells us how much the gold is worth. What difference does it make whether the U.S. stupidly clings to its last official price; or, throws in the towel and admits that the market price for gold is the real deal?

Contrary to the claim that the move “would add $750 billion to the Treasury overnight”, I say BS. For the U.S. to take advantage of this in any meaningful way, the Treasury would either need to issue more debt in amounts that exceed what it issues on an ongoing basis already. Or, it would need to sell some of its gold at the higher market price.

Well, bully! Do you think the U.S. alters (or will alter) the issue amounts of new Treasury debt based on its own official price for gold? Of course not! And, if the U.S. wanted to sell some of its gold, it would get the market price for it; regardless of what the U.S. “official” price is. And, furthermore, Treasury could issue huge new amounts of debt now, or sell gold now, if they wanted to – without repricing the U.S. gold reserves.

So, what has changed? Nothing.

MORE BS & CONCLUSION

Someone exclaimed errantly that “Monetizing the asset side of U.S. balance sheet WILL SEND GOLD & SILVER SOARING”. No, it won’t. Monetizing the asset side of the U.S. balance sheet is a non-event. Any actions that would disrupt or alter to any degree the ordinary market activity for gold and silver are independent of any actions taken by the U.S. to reprice its own assets.

Unrealistic expectations for the gold price which are based on any of the above “news” items are likely to be a source of disappointment for investors.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED