For most of the past half-century, US Treasury bonds have easily outperformed gold as a type of investment bought and held. Today, the status of US Treasury bonds as the ultimate safe haven is facing one of the greatest challenges ever before.

Traditionally, investors have flocked to US Treasury bonds as an ultra-safe investment backed by the world's economic powers and paying a stable income. For buyers from individual savers to buyers in sovereign countries, these characteristics make it a better investment choice than gold, which, although still highly sought after as a scarce commodity and hedge against inflation, does not generate cash flow like bonds.

Recently, this relationship has been changing, and recent trends are favorable to gold. The benchmark Bloomberg US Treasury Total Return Index is on its way to its third annual decline, extending the decline since peaking in 2020 to 11%. In contrast, gold hit a new high this week and has recorded a 15% return so far this year alone.

The return on investment in US bonds/gold fell below the decades-long support line

Kristina Hooper, chief global market strategist at Invesco, said that the differences in the performance of these two traditional safe-haven assets reflect investors' deep concerns about soaring US government debt and a growing preference for real assets.

“The first choice for safe-haven assets has become gold rather than US Treasury bonds,” Hooper said. “The bigger subject is concern about America's huge debt and unsustainable US fiscal conditions.”

This divergence in performance means that gold has surpassed US government debt as a long-term investment. One dollar invested in gold 51 years ago is now worth $2,314, which is $172 more than the return from the Bloomberg US Treasury Index, which came out in 1973. (This comparison does not take into account the storage costs of holding gold)

The 50-year return on gold surpasses US Treasury bonds

In many ways, the recent plight of US Treasury bonds is easy to understand. This is mainly due to the Federal Reserve's aggressive monetary tightening actions since 2022, which boosted US Treasury yields and hit US bond prices hard.

The rise in gold, on the other hand, is even more difficult to interpret. In theory, an increase in real interest rates (that is, interest rates adjusted for inflation) should reduce the appeal of gold, making assets that do not generate any return less attractive. However, the price of gold continued to rise.

Analysts pointed out that central bank purchases are one of the main forces driving the rise of gold. For example, the central bank of China increased its gold reserves for 18 consecutive months while reducing its holdings of US Treasury bonds.

Meanwhile, deep-seated concerns surrounding America's growing debt and deficit have raised broader credit concerns. Since the pandemic, the growth of US Treasury bonds has accelerated, almost doubling in the past ten years to about $35 trillion.