Bonds Bubble vs Gold Bubble

PIMCO’s founder and star manager Bill Gross called the bonds bubble too soon. He got a lot of flak for getting out of Treasuries before Treasuries had a good run. Many people point to this as a case-in-point for the failure of active management. He had to issue a mea culpa saying he was wrong.

At the same time bonds ran up in prices, gold also did very well. The mainstream model portfolios typically don’t include gold. Gurus I admire, John Bogle, Burton Malkiel, David Swensen, et al don’t recommend investing in gold.

A March 2010 LA Times article said Vanguard founder John Bogle thought "gold is now the wrong place to invest." Gold price was about $1,150 per ounce at that time. It’s about $1,750 now. If you listened to John Bogle in March 2010, you missed a 50% run up.

In a December 2009 interview, Burton Malkiel, author of A Random Walk Down Wall Street, suggested investing in a broad stock market index fund, which includes gold mining companies like Freeport-McMoRan Copper & Gold, instead of buying gold at then $1,200 an ounce. A broad stock market index fund gained about 20% since then. Freeport-McMoRan stock returned no more than 10%. Gold is up 45%.

A September 2011 article in Yale Daily News quoted Yale President Richard Levin saying the Yale endowment didn’t invest in gold. Swensen also missed a big run-up in gold.

Bill Gross, on the other hand, probably missed no more than 5-10% return for getting out of Treasuries too soon. PIMCO Total Return Fund lags Vanguard Total Bond Market Index Fund by about 3.5% year-to-date.

I’m not picking on Bogle, Malkiel, or Swensen to say they are "wrong" in not recommending investing in gold. I’m just showing that the market can go against all rational evaluations. With regard to a bonds bubble versus a gold bubble, there are these possibilities:

1. Bill Gross was right in getting out of Treasuries. Buying Treasuries at high prices was too risky even though their prices can go higher or stay high for a long time.

2. Bill Gross was wrong in getting out of Treasuries. Treasuries are not in a bubble. Their prices are where they should be.

3. Bogle, Malkiel, and Swensen were right in not investing in gold. Buying gold was too risky even though gold prices can go higher or stay high for a long time.

4. Bogle, Malkiel, and Swensen were wrong in not investing in gold. Gold is not in a bubble. Gold price is where it should be.

How do you know which is the case? Just because the market went against someone, does it mean they are wrong? Why should Bill Gross be blamed for a miss if Bogle, Malkiel, and Swensen had much larger misses?

I still don’t know whether Bill Gross is right in getting out of Treasuries. I also don’t know whether Bogle, Malkiel, and Swensen are right in not investing in gold. But I know I shouldn’t judge them just by which way the market went. Not by the short-term results anyway.

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  1. Mark says

    Good perspectives, but I think you missed the point. The reason Gross should be blamed is not because he was wrong [Was he? Only time will tell.], but because he was wrong about the TIMING. If you are actively managing other people’s money [or your own, for that matter] it’s not enough to be right about the direction unless you were in the trade at the right time as well. Remember that “the market can remain irrational a lot longer than you can remain solvent” [JM Keynes].

  2. trader says

    Bonds are definitely a bubble. At current yields the 10 yr bond is a really bad investment as inflation is high and likely to stay high. This means that the real yield that you earn on 10 yr bonds is negative – money losing trade. Notice that I said ”investment” here. Trading short term is a different issue and you can make money on long positions if you get out quickly. The market is volatile and there would be chances for trading desks to do that. I wouldn’t suggest that individual investors play this game.
    Over time the disastrous fiscal and current deficits, the money printing presses at the FED and the irresponsible politicians are likely to destroy the market in treasury bonds. I expect the market to collapse but the timing is not certain. I doubt it would last beyond 2015 but who knows. When this big sell off happens, the FED will be the buyer of bonds of last resort and they will monetize debt causing very high inflation.
    In this environment the best investment out there is gold. It is crazy to call it a bubble when only less than 1% of global assets are invested in gold. People haven’t bought gold yet. Watch what will happen when they start buying. Price is likely to go to 5000 and higher.

  3. DTSC says

    It just goes to show that even respected experts can be very wrong some of the time. So who should one listen to? I don’t know who to pick, so I just invest in index funds.

  4. bongstar420 says

    The only reason people are buying Gold is because they think they will be able to trade or sell it at a higher valuation than what they originally agreed to. This makes the market the same as all the other markets people are trying to get rich from by doing almost no work.

    What has happened in every market that people speculated on?

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