FT.com / Markets / Insight - Yen has edge over gold in battle for supremacy

This article from the FT discusses two of my favorite topics these days: gold and deflation.

First, as to the investment merits of gold, here it is:

The inconvenient truth is that gold is not really an investment at all. Since it generates no return and thus has no fundamental value, the same arguments can be used to justify any price – $500 an ounce or $5,000. Gold buyers are simply trusting in the bigger fool theory – that someone else will take it off their hands at a higher price. They are speculating, not investing, and like all speculators what they are speculating on is the speculations of other speculators. Packaging it in an exchange-traded fund makes no difference.

Actually, the column's author (Peter Tasker) makes the interesting observation that yen-based assets - including bonds - have actually been a much better store of value than gold over the last few decades. True, yields on Japanese government bonds look ridiculously low, but Japan is suffering through a serious bout of deflation, so any positive returns are actually pretty decent returns:

Best of all, the yen is not a sterile asset like gold. It generates a return. Officially CPI deflation is 1.5 per cent, which means holders of yen get a tax-free gain of 1.5 per cent in purchasing power every year. However, according to the American scholar David Weinstein, the official numbers understate Japanese deflation by several percentage points.

If he’s right – and intuitively 1.5 per cent does seem too low – then Japanese cash is generating a very competitive return. Maybe that’s why Japanese households and companies have been stockpiling it, come rain or shine.

Here's what I don't get: I continue to read financial stories that claim that the Treasury bond market is the latest bubble, and that yields on US government debt are sure to soar any day now. Why? Oh, say the bears, don't you see the huge government deficits, and the market will be demanding much higher yields due to our profligate government.

Well, maybe, but Japanese government debt as a percentage of GDP is now something like 200% of GDP (the US is "only" 125% of GDP, if you include Social Security and other obligations) yet yields continue to move lower.

I agree with Mr. Tasker: buying gold here is simply another speculation on a commodity which may or may not work out (maybe you should have bought wheat futures - wheat's up +90% over the last month!). It is hard to due any fundamental analysis on gold, since the dynamics of the gold market are murky.

Bond yields may move higher, but it will take a policy response to make this happen. Today's weak jobs figures confirm again that the US remains mired in a slow growth economy, and reliable yield will continue to be sought after by investors.

FT.com / Markets / Insight - Yen has edge over gold in battle for supremacy