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fate of us treasury

From Birch Gold Group

Last month we discussed the disconcerting trend taking place in the market for U.S. Treasuries. As of October 28, the foremost treasury holders – countries like China, Saudi Arabia, and Japan – were creating the biggest sell-off we’ve seen in recent history. As a result, the level of “custodial paper” – essentially money paid by foreign countries to buy U.S. Treasuries and held by the Federal Reserve – dropped to its lowest level since 2012. In other words, countries started cashing in treasuries faster than they have in years.

But now, the situation is getting even worse. Changes in stateside political headwinds and a continuation of treasury liquidation by foreign central banks paint an ominous picture. Could this seal the fate of U.S. Treasuries?

This Chart Tells the Whole Story

You don’t have to look much further than the data on U.S. Treasury sales by foreign central banks to understand the gravity of what’s happening. The following chart covers selling activity all the way back to 2001, and it suggests we’re in the middle of an unprecedented sell-off.

zerohedge-chart

Source: ZeroHedge

As you can see, we’re venturing into new territory, and nobody knows for sure where this trend is heading.

Saudi Arabia and the “Trump Factor”

Saudi Arabia has a pivotal role in what we’re seeing today for two reasons. First of all, it holds more U.S. Treasuries than any other oil-producing nation. Second, and the main reason for its selling activity, it’s being forced to offset financial woes caused by the steep drop in oil prices this year.

Generally speaking, Saudi Arabia has little incentive at this point to keep holding its stake in U.S. Treasuries.

Plus, there’s a third variable coming into play as Donald Trump enters the White House. Trump has flirted with the idea of banning oil imports from Saudi Arabia and other OPEC countries if they don’t support the fight against ISIS, and it’s ruffling a lot of feathers.

If he follows through on that idea, it’s conceivable to think that Saudi Arabia would be inclined to unload even more U.S. Treasuries, both out of spite and necessity (less demand from the U.S. equals an even lower petrodollar).

Why It’s Good for Gold

You’re probably wondering why treasuries are still holding steady with all this sell-off activity from foreign central banks. The answer is simple: as foreign central banks cash out, private retail investors are buying in. There’s no clear reason why, but there are enough private buyers in the market right now, who still trust the safety of treasuries as a safe haven asset, to keep it afloat.

But what happens if foreign central banks keep selling at the rate they are today? All those smaller buyers will eventually wake up, smell the coffee, and start a sell-off of their own.

When that hoard of buyers get spooked, a great many of them will ditch the false “safe haven” of treasuries for a true safe haven, i.e. real assets, primarily gold. An influx like that would boost prices significantly and make gold owners very happy – but only those who saw it coming and acted quickly.

  • ROBINSTEEL

    With the dollar up relative to other currencies, doesn’t it make sense for the bond holders to cash in while they can?
    Couple that with the fear that Trump will cut support for the defense costs of the Saudis and Japan; and the general antipathy toward American interference in the Middle East; and you have a serious problem that traps the US in a quagmire of costly wars,…It only makes sense that countries might not want to invest in a country that uses the money to build up the military, and buys technology that can be used against them, while gathering every bit of electronically transmitted data, from phone calls and porno to media and financial records.
    If you recall the reaction to the first invasion of Iraq, when the dollar fell 30% against the euro, you will see that when we “go too far”, we suffer retaliation. The fraudulent election results that got us Trump; is going to make the rest of the world see the hypocrisy and criminality of the “Capitalist Democracy”; and result in a concerted move against our bonds.

  • ROBINSTEEL

    With the dollar up relative to other currencies, doesn’t it make sense for the bond holders to cash in while they can?
    Couple that with the fear that Trump will cut support for the defense costs of the Saudis and Japan; and the general antipathy toward American interference in the Middle East; and you have a serious problem that traps the US in a quagmire of costly wars,…It only makes sense that countries might not want to invest in a country that uses the money to build up the military, and buys technology that can be used against them, while gathering every bit of electronically transmitted data, from phone calls and porno to media and financial records.
    If you recall the reaction to the first invasion of Iraq, when the dollar fell 30% against the euro, you will see that when we “go too far”, we suffer retaliation. The fraudulent election results that got us Trump; is going to make the rest of the world see the hypocrisy and criminality of the “Capitalist Democracy”; and result in a concerted move against our bonds.

  • Ken Richardson

    Robinsteel, Wow, you are really out there aren’t you. If we didn’t have Pelosi to push the war in an all Democrat led house for Bush and then later failed policies of Obama and Hillary causing ISIS to form and the middle East to come apart at the seams, we wouldn’t still be there. The dollar is strong because we are a capitalist country and these countries have money saved for a rainy day and are using that money. The Euro is failing because of failed policies and influx of Muslims. It’s like the fall of Rome only much bigger. Japan at 229% of GDP and large interest in Euro will follow right behind. The wealthy are plowing their money into US dollar so to not lose their wealth. This causes dollar to rise, stock market to create bubbles of over valued stocks and then biggest crash ever. No one will stop it this late in game. Obama has made sure of that. It will take 30 yrs to correct. The good thing that will come out of it is socialism will vanish due to people seeing it’s true colors. Fraud and criminal government will be gone. China will emerge the new powerhouse. We will see gold at $5000+ an ounce. The untitled ones will have nothing but truth before them and will be the fall of Democrats. You may even open your eyes.

  • ROBINSTEEL

    Yup, out here in Berkeley…Anyway, I get your take on the Dems, just the middle of the “Capitalist Party” that the Repubs inhabit too.
    The move toward Fascism is inherent in all societies unless those in control of government are dedicated to the ideals that every person espouses in his heart…Maximum Freedom.
    That would eventually shrink government, not grow it, so just from that perspective, we are headed in the wrong direction,,,not just the US, but everywhere. It would be good to read some recent history, and that starts with WW II, and the research that centered on the question of “why did the German people go for Hitler so easily?” You can get a lot of that from Wilhelm Reich’s
    “The Mass Psychology of Fascism” I’m pretty sure Karl Rove did.
    I have a lot of drivel on SA, if you want to see more…Cheers, Robinsteel