Gather round, #gold bugs, while I tell the story of how a $13 trillion pile of negative-yield sovereign debt explains the recent surge in bullion prices (thread):

bloomberg.com/opinion/articl…

The very idea of negative-yield debt feels a bit Through-The-Looking-Glass. You're supposed to *earn* money from lending cash, not *spend* money for the privilege of doing so.

And yet from zero five years ago, negative-yield debt now accounts for almost 40% of government bonds:

The value has risen particularly fast in the past month -- roughly $2 trillion, of which $1 trillion has happened since the start of last week.

This isn't quite as crazy as it seems. Professional bond investors don't care about the yield (interest rate) so much as total return: yield, plus capital gains or losses. As long as the bond rally is strong enough, the capital gains will offset the negative yield.

Still, I think something instinctive stick in the craw about buying negative-yield debt. Unless you can sell at a higher price, you're basically guaranteeing yourself losses.

I suspect the rising stock of -ve-yield debt causes some people to switch to other assets, such as gold.

It doesn't take many people to do this to cause an outsized effect on the market. The sovereign bond market is about $33 trillion. The investment gold market is about $2 trillion. If just 1.5% of sovereign bond investors switch to gold, investment gold demand goes up about 25%.

For what it's worth, the effect is potentially even greater in relation to Bitcoin, which is an even smaller market at $227 billion and has risen 60 percent over the past month.

bloomberg.com/news/articles/…

I'm generally a bit of a Bitcoin skeptic but the best argument for it is that, in theory, it could become a negative beta asset that has the same virtuous role in an investment portfolio as gold and bonds.

So far, it's instead showed strong positive beta: bloomberg.com/opinion/articl…

What's going on in the European sovereign debt markets is IMO the most extraordinary under-reported finance story in the world today.

Benchmark 10-year government bonds have been below zero in:

Germany 🇩🇪
France 🇫🇷
Netherlands 🇳🇱
Sweden 🇸🇪
Austria 🇦🇹
Denmark 🇩🇰
Finland 🇫🇮
Japan 🇯🇵

Ireland, Spain and Portugal -- countries that were in putting-the-IMF-on-speed-dial territory a few years ago -- have yields south of 0.5%.

*Italian* one-year debt has been trading with a negative yield.

Next to all that madness, gold breaking out of its six-year $1,350/oz cap is a pretty modest move, frankly.

bloomberg.com/opinion/articl…

There's two enduring advantages to bonds.

They have very limited downside. Buy 10-year Swiss government bonds at the current 105 price and hold to maturity paying the current -0.5% negative yield and the worst that could happen (barring Switzerland defaulting) is you lose 10%.

The same isn't true of gold. If it returns to the level it was at a month ago you've lost about 10%. You've lost 17% if it falls to recent support levels around $1,150/oz. Should it fall to the median miner's operating costs around $950/oz you've lost ~33%.

Also, they're pretty cheap to own. Gold ETFs can lose money from negative roll yield when, as is almost always the case, the futures curve is in contango: bloomberg.com/opinion/articl…

Owning physical gold costs you even more in guarding and safehousing!

So I'm certainly not saying "buy gold". I'm temperamentally a gold bear, although events keep pushing me the other way.

But, at this point the crazy move of buying gold isn't looking that much more crazy than other things happening out there.

As @arpitrage says here, the bond market looks to be in a fixed-income bubble with people investing for greater-fool reasons:

https://twitter.com/arpitrage/status/1144102748742410240

@arpitrage Given that spot gold and measures of even *U.S. bond market* total returns tend to do about as well as each other in any given year, it's a coin-toss which you pick.

Read the full column here: bloomberg.com/opinion/articl… (ends)

@arpitrage BTW, I of course don't give out investment advice, but the better answer than "buy gold" or "buy sovereigns" is always "buy equities, consistently and ignoring market fluctuations, until you're 10 years from retirement"