Source: Zhitong Finance

For most of the past half-century, as a purchased and held asset, US bonds easily surpassed gold in terms of performance. But today, the status of US debt as the ultimate safe haven is facing one of its greatest challenges to date.

Traditionally, investors flocked to buy US bonds and thought it was a super safe investment — with stable returns and the support of global economic powers. For buyers from individuals to sovereign countries, these attributes make US bonds a better investment than gold because gold doesn't generate cash flow like bonds, yet gold is still coveted as a scarce commodity and a hedge against inflation.

This relationship has recently changed, and the trend has become favorable to gold. According to the data, the Bloomberg Treasury Total Return Index is expected to experience its third annual decline in four years, widening its decline to 11% from its peak in 2020. In contrast, the price of gold hit a new high this week, and the return so far this year has reached 15%.

According to Kristina Hooper, chief global market strategist at Invesco, the difference between these two assets shows that investors are increasingly concerned about soaring US government debt, so they prefer real assets. She said, “The choice of safe-haven asset class has changed to gold rather than US debt. The larger theme was concerns about massive debt and concerns about the unsustainable state of the US fiscal situation.”

As a long-term investment, gold's performance has now surpassed US debt. One dollar invested in gold 51 years ago is now worth $2,314, which is $172 higher than the return of the Bloomberg Treasury Bond Index, which was first introduced in 1973 (this comparison does not take into account the storage costs of holding gold).

The recent struggles in the US bond market are easy to understand. The main reason is that active monetary tightening actions by the Federal Reserve since 2022 have boosted US bond yields, and recent remarks by Federal Reserve officials suggest that policymakers want to keep interest rates high for a longer period of time.

At the same time, deep-seated concerns about the US government's rising debt and deficit have intensified. Since the pandemic, US government debt has accelerated, almost doubling in the past decade to around $35 trillion.

What is more difficult to decipher is the sharp rise in the price of gold. Theoretically speaking, rising real interest rates should weigh on the price of gold, making this asset without any return less attractive. However, the price of gold has risen while real interest rates have risen. Analysts pointed out that central banks' purchases are the main driving force behind the rise in gold prices. For example, the Central Bank of China has contacted 18 months to increase its gold holdings.

Of course, the performance of US debt compared to gold has been different over the past few decades. It lags behind at some point in time, but it will once again take the lead. Gold's excellent performance is usually accompanied by higher volatility. For example, the price of gold soared in the late 70s of the last century, when investors sought to hedge against the risk of inflation.

In the 80s of the last century, former Federal Reserve Chairman Paul Volcker (Paul Volcker) began a 40-year bull market in the fixed income market in an attempt to cool down inflation, then bonds began to catch up. The 10-year US Treasury yield fell from nearly 16% in 1981 to 0.3% in 2020. As bond prices rose, investors got a windfall. But low yields sowed the seeds for subsequent declines, including the Federal Reserve raising interest rates to curb inflation, which led to an unprecedented 12% fall in US bonds in 2022.

However, according to Julian Brigden, co-founder of Macro Intelligence Partners, the current poor performance of US debt is not only temporary, because an aging population and shrinking savings mean there is not enough demand to meet the growing supply of debt. He said bluntly: “We are in a bear market for structured bonds. Bonds aren't a good hedge. Gold is taking over the market.”

Editor/jayden