Bullion As An Alternative to ‘Shorting’, Part I

In a recent commentary, I characterized gold and silver bullion as a “superior� asset-class, versus virtually any other investment options. In this series of commentaries, I'm going to focus upon the versatility of bullion as an investment.

Experienced precious metals investors are familiar with the many “drivers� which have been identified for the precious metals market. However, this is simply another way of saying that bullion is a good proxy for many of the dynamics in markets (and the overall economy) today.

This is a concept which is especially useful with respect to investing in a “short� position (i.e. betting that a particular investment will go down rather than up). “Shorting� a market is inevitably a much more high-risk investment than going “long�.

To begin with, there is the potential for infinite losses. Bet “long�, and you can never lose more than 100% of your investment (assuming we avoid the insanity of “margin� in our accounts). Bet “short� however, and there is no limit to potential losses, since there is no (theoretical) limit on how high any particular investment could rise (except for bonds). Add to that the further risk of being forced-out of your short-position, and we can see that this is a particularly precarious form of investing, best left to trading experts.

What makes this a frustrating reality is that investors who are strongly bullish on precious metals inevitably believe that there are many other asset-classes which are going to plunge in value – due to many of the same dynamics which will cause bullion to rise. Since many of those doomed asset-classes are U.S. investments, I will focus this discussion on some of those asset-classes.

As even the mainstream media begins to clue-in to the U.S. Treasuries market, talk increases about the massive “bubble� in this market: the highest prices in history, at a time when more supply is being dumped onto this market than at any time in history and global debt-markets were already saturated with U.S. debt before this “big dump� began. In private conversations with readers, on more than one occasion talk has turned to “shorting� this particular market.

Thanks to the large in-flux of “short� ETF's, even ordinary retail investors can set up a short position against virtually any market. Put another way, the bankers have made a huge effort to increase investor access to the trades which have both the highest probability of losses and the potential for the greatest possible losses. And we are supposed to conduct these trades in the most “rigged� markets in the history of human commerce.

Let's examine the potential risks facing an investor who chooses to short U.S. Treasuries. Treasuries prices are near their theoretical maximum (as previously mentioned, only bonds have a theoretically-maximum price, as interest rates move towards zero), so this would seem like the “safest� short-trade imaginable.

Perhaps the best way to identify the hidden risks to this market is to simply ask ourselves: why hasn't this ridiculously-inflated bubble imploded already? All things being equal, the greatest “supply� in history for U.S. Treasuries implies the lowest prices in history, not the highest. Bond-pumpers will argue, however, that “all things are not equal�.

As U.S. debt spirals exponentially higher, and government revenues plummet at the fastest rate in history, the United States already has debts and liabilities exceeding those of all the rest of the planet, combined – despite only representing about 5% of the Earth's population. It is hopelessly insolvent by any, rational measure. And still the bond-bulls trot-out the absurd argument that U.S. Treasuries represent a “flight to safety�.

The best rebuttal for this position is to refer to a somewhat generic, cartoon image. A cartoon character sees some gigantic boulder about to fall on top of him, and quickly pulls out an umbrella for “protection�. Quite obviously, U.S. Treasuries are the “umbrella�. The “boulder� is the largest debts in history, the largest liabilities in history, the largest deficits in history – combined with massive, structural unemployment and falling, real wages (i.e. no revenues to make payments on all this debt).