This from The Sovereign Society:

In the last few weeks, Treasury yields have been headed upward – from 2.63% a month ago to 3.33% today on 30-year bonds – and everyone’s been asking whether the bubble has finally blown out.

The “Treasury Bubble” became the new boogeyman for many experts and media pundits last year. Its “impending” collapse could potentially crush the U.S. government and throw the dollar into rampant hyperinflation.

But is it a bubble at all? And if so – or not – what’s your most prudent course of action?

That’s what we’ll be talking about today, on the heels of Ben Bernanke’s latest announcement that he’d consider purchasing long-dated bonds in the open market to manipulate yields. Will Bernanke’s plan be the final nail in the coffin for the U.S. economy and the dollar, or will it further propel a 27-year bull market in Treasuries?

Just the Facts…

That we’ve been in an almost thirty-year bull market for Treasuries is perfectly clear.

Since October of 1981, when yields hit 15.21% on long-term bonds, Treasury yields have been on a downward trend. And aside from a few reversals in that span of time, yields have consistently been lower each year.

But Bill Gross – Manager of PIMCO’s Total Return Fund – admits that the Treasury market is showing “some bubble characteristics,” and reiterates a previous statement, “…I have said for the past three months, the governments are very overvalued.” Do Gross’ cautious statements back up the allegations of Peter Schiff and other “Treasury Bubble” proponents?

The very essence of a bubble is that it’s unsustainable in the long run. So let’s ask the question; what happens if this bull market continues and 30-year government paper reaches a yield of zero?

Sustained rates at that level would indicate the market’s belief that we’re in a deep depression. Essentially, the market would be saying that it would rather park money with the government for 30 years – with a guaranteed return of zero – than risk it in private-sector investments. Retirement fund managers would be forced either to adjust their expected returns or abandon Treasury debt altogether.

But investors in zero-yielding Treasury paper would actually be taking on more risk than they might expect. And that’s the risk of a rising interest rates…

Interest Rate Risk

Even if Treasury yields reach zero, it’s not likely they’ll stay there forever. And when yields once again start to rise, it puts the capital investment of bondholders at risk.

Let’s say for example that Treasuries are yielding zero and you purchase a US$1,000 dollar note without any discount (so you’re paying US$1,000 for the bond). Then, rates eventually rise to 1%. That means that buying the same bond will only cost you US$990, even though you’ll still be reimbursed the full US$1,000.

That means you’ve essentially lost 1% of your original capital investment, as the market price of your bond would change to reflect the new issue yielding 1% more than your original purchase. As you can imagine, the lower yields get, the greater the risk to an investor’s capital is likely to be.

The “Treasury Bubble” and YOUR Money…

It’s hard to tell whether Treasuries are currently in “bubble” mode.

Unfortunately, most bubbles just aren’t diagnosed until after-the-fact. While they’re clear in hindsight and defining “unsustainable” levels is easier after the bust, the real defining attribute of a bubble is the rampant sell-off and ensuing havoc that come once the bubble has popped.

So should you join in with the “Bubble-phobia” and steer clear of Treasuries?

It’s a good idea to steer clear of Treasuries right now, but not because the Treasury-bubble-boogeyman is hiding under your bed. Simply put; the interest rate risk seems far too great for the meager reward of near zero-yielding Treasury securities. In light of the news, we can safely expect Bernanke to do everything in his power to suppress that long end of the curve. And we can probably expect the market – in turn – to continue to disagree, leaving Treasuries in a relatively volatile position.

Instead, Investment Director Eric Roseman believes there’s a case for select issues of Investment-Grade Corporate debt. It’s also a great time to look at gold, “With interest rates now at 0%,” Eric recently said, “the cost disadvantage to holding gold has vanished because high quality Treasury bond yields have plummeted while T-bills pay nothing. Gold will probably safeguard your capital better than paper money in this environment.”

Source: The End of the Treasury Bubble?

This from Today’s Financial News:

The old saying that cash is king is not as true as it used to be. With so many investors fleeing the turbulent markets, billions of dollars in cash are sitting on the sidelines, with investors looking to stash their stockpiles in any safe place they can find.

The American government has been the go-to repository. As the safest of them all, Treasury bonds are seeing huge demand. But with demand comes increased prices, and with increased prices comes dwindling interest rates.

The privilege of loaning your cash to Uncle Sam is no longer a profitable one. Give the government a few thousand bucks for the next few years and it will hand you a couple of nickels to rub together. As the value of the dollar declines because of these low interest rates, the situation only promises to get worse.

That is why hordes of investors are turning away from the bond market and once again tossing some money into the gold market. Gold prices made significant moves last week and are on the rise once again this week. As I write, gold is trading for close to $840. That means the precious metal has tacked on roughly $100 since its November lows.

Hurricanes are tough to predict

If you want to know which way gold prices are headed, it depends on who you ask. Some analysts say, $1,000, $1,500 or even $2,000 an ounce is just around the corner. Others say the fundamental value in gold is waning fast and bearish investors should watch for $600 or even $500 per ounce.

As the world’s economy strengthens, the bears will be right. But in the meantime, the declining dollar, the high-risk equities market and fears of government supported inflation are going to propel gold’s prices dramatically higher.

There are multiple ways to take advantage of the price hikes. The simplest would be to buy a gold-based ETF like SPDR Gold Shares (NYSE:GLD).  But if you want to magnify the potential gains, use the leverage created by investing in a gold miners like Goldcorp (NYSE:GG) or Barrick Gold (NYSE:ABX). Their current valuations look quite cheap if gold starts to soar.

But with so much uncertainty in the economy and the government ready to re-write the economic textbooks, investors must be aware of the increasing risks. In an ill-informed attempt to “jolt” the American economy back into high gear, the government could easily force gold prices off their track and into a canyon of deep declines.

Source: The Gold Debate Heats Up

This from Money Morning:

Gold hit two historic milestones in 2008.

First, in early March, the “yellow metal” hit its all-time high of $1,030 an ounce.

Just months later, the price of gold for December delivery had plummeted to $681 an ounce, a 21-month low and 33.9% drop from its record high.

Most gold bugs were equal parts puzzled and broken-hearted. The world’s stock markets tanked, as did some of its biggest economies. In such an environment, they thought, gold should have risen. After all, gold is widely considered to be a safe-haven investment when everything else is spiraling south.

However, Money Morning Contributing Editor Martin Hutchinson – an investment banker with more than 25 years’ experience on Wall Street and a leading expert on the international financial markets – understood perfectly what other investors did not.

“Gold is not a safe haven against recession,” said Hutchinson. “It’s a safe haven against inflation.”

In the past year, commodities prices skyrocketed – across the board. That was especially true of oil, which hit a record high $147 a barrel. Corn, wheat, and soybeans all hit record highs, as well.

That price escalation tightened household and corporate budgets, and was a primary reason why the U.S. economy posted a gross-domestic product (GDP) decline of 0.3%. With that negative growth, the third quarter was the beginning of what many experts believe will be the nation’s first recession since 2001.

However, the inflation epidemic has waned significantly, as global demand for raw materials has plummeted.

Price for such staple foods as corn, soybeans and wheat have all come down from their record highs – in near-lockstep fashion.

Corn futures are down nearly 50% from their summer high of $8 per bushel. The same is true of soybeans and wheat, with each having lost roughly half their value. In fact, wheat hit a 16-month low in mid-October.

As most of us noticed, gas prices have fallen 48% from their July 17 high of $4.114 a gallon.

And not coincidentally, gold has fallen 22% in that same time frame.

However, this report examines the pending commodities rebound – a projected slow-and-steady increase in commodity prices that will reverse the breakneck plunge below fair value that commodities have experienced for much of this year.

Our objective now: To chart the expected path of gold prices in the New Year.

This report also reveals another wild card inflationary indicator that Hutchinson believes will carry gold prices to $1,500 an ounce by the end of 2009.

Two Catalysts For Gold’s Climb

The U.S. Department of Agriculture’s Oct. 10 Crop Production Report said acreage for a handful of staple food commodities has shrunk:

• Corn acreage fell 1.2%.
• Soybean acreage dropped 1.4%.
• Canola acreage dropped 1.9%.
• Sunflower acreage shrank 0.8%.
• And acreage of dry edible beans fell 0.7%.

That naturally translates to higher prices because it squeezes the supply of the particular commodity. And it does so at a time when demand continues to escalate from populations in China, India and Latin America. And higher prices equal inflation.

But Hutchinson – who correctly predicted this last run-up in gold prices – says there’s another catalyst that’s right now inherent in the U.S. economy that could help vault gold prices to $1,500 an ounce by the end of 2009. And it has to do with the much-ballyhooed $700 billion rescue plan.

The philosophy behind the rescue plan is elegantly simple: By providing a portion of the $700 billion to foundering U.S banks, the Treasury Department believed it could provide banks with badly needed capital, and get them to start lending money once again – jump-starting the economy in the process.

Since September 2007, U.S. Federal Reserve policymakers have cut the benchmark Federal Funds target rate nine times – from 5.25% down to the current 1.0% rate – to increase bank-to-bank lending and bank-to-consumer lending.

“The government is pumping money in so many banks, and that money has to come out somewhere,” Hutchinson said.

Right now, banks aren’t boosting lending. Instead, they are using the cash to finance buyouts of other banks. Even so, that money will “come out” into the economy in the form of higher stock prices for banks. That will make consumer/investors wealthier, and could make them more confidence in the economy. If they’re more confident, they will spend. As that happens, food prices should begin ticking upward, adding another set of thrusters to gold prices.

“Everybody thinks that because we’re having a horrible recession, we’re not to going have inflation. I think that’s probably wrong,” Hutchinson said. “I think gold has quite good hidden-store value.”

As gold prices increase, count on more investors leaving the sidelines to invest, too, causing the surge in gold prices to accelerate and steepen.

“As gold goes up, it gets more popular and investors start piling into it,” Hutchinson said.

And if gold gets anywhere near the $1,500 mark, sell. Prices that high will likely fall back or plateau as the Federal Reserve begins raising interest rates and strengthening the U.S. dollar, Hutchinson said.

Five Ways to Play Bottom-Basement Gold

Before we get too far ahead of ourselves, let’s first look at five ways to play bargain-basement gold prices.

The SPDR Gold Trust ETF (NYSE:GLD) – formerly StreetTracks Gold – is a fund whose shares are intended to parallel the movement of gold prices. Since gold prices started falling along with gas prices, SPDR Gold Trust has stayed within a 0.5% margin of gold prices. This exchange-traded fund (ETF) eliminates any investor concern over storage and delivery while giving them exactly what they want – gold.

Toronto-based Barrick Gold Corp. (NYSE:ABX) has 27 mines, mostly in North America and South America, and is developing or exploring 11 more. With a market cap of more than $20 billion, it has considerably more liquidity than most mining companies. Barrick is primarily a gold miner, but it also has copper and zinc mining operations. As far as investors are concerned, there are two ways to look at that: It’s not a pure play, per se, but then again, this is a company stock, not a bar of bullion. Also, having operations other than gold can help stabilize the company’s bottom line in case problems arise at a gold mine.

Denver-based Newmont Mining Corp. (NYSE:NEM) is primarily a gold producer with operations in the United States, Australia, Peru, Indonesia, Canada, New Zealand and Mexico. Its reserves are hovering around 86.5 million ounces. Like Barrick, this is a mining stock play, and is subject to market swings – as well as fluctuations in gold prices. That can be a significant tailwind, especially if you believe the stock market has bottomed out or is close to doing so. Hutchinson – forever a value-oriented investor – warned that Newmont might be a little too pricey now. Investors may want to wait for the company’s stock price to settle before getting in.

Hutchinson thinks the best value for a gold mining stock can be found in Yamana Gold Inc. (NYSE:AUY), another Toronto-based company that’s small now, but has rapidly expanding production.

But for investors who just want gold – not an ETF or stock – the best avenue is an EverBank Select Metals Account: EverBank accounts has a minimum deposit that is 98% lower than its competitors, and its commission costs are up to 86% lower than other metals’ brokers and bullion banks. It offers two types of gold accounts: Unallocated (your purchased gold is pooled with that of other investors, eliminating storage and maintenance costs; the minimum deposit is $5,000), and Allocated (you directly own the gold you purchase, held in your own private account; $7,500 is the minimum deposit here).

Both types of accounts can be set up 24/7 online. But if you prefer the phone, call 866-326-6241, and be sure to give them the code 12608 when setting up an account.

We should point out that the publisher of Money Morning has a marketing relationship with EverBank, but that’s because its products are among the best in class.

Source: Five Ways to Play Gold’s Rebound to $1,500 an Ounce