Have bearish investors gotten ahead of themselves regarding buying gold and Treasuries? One strategy some people (who are bearish about stocks) use is to buy gold and long-term Treasuries with the expectation that they will go up in value when stocks crash.  The problem is that if too many stock market bears did this then they would make the price of gold and bonds too high to make this strategy succeed.
Gold should only be roughly 1,000 based on its long-term pattern of appreciating in line with CPI inflation; instead it has been around $1,500. Perhaps the $500 “excess” price is like a long-term put on stocks? If a repeat of the crash of 2008 occurs perhaps gold will go to 1,900, repeating its performance in the crisis of 2008-2011. If that happens then half of the estimated future upward move has already occurred, even though there is currently no recession.
Long term Treasury prices tend to go up during a crisis, mainly because yields go down in anticipation of an economic slowdown. But if today’s ultra-low yields (negative in Germany and Japan) have already moved low enough to anticipate and reflect a future recession, then that implies yields may not go down much more. I anticipate that the economic authorities in most countries have secretly burned out on using negative rates and QE and they realize these are dangerous for banks, insurance companies, and retirees. Thus, a recession next year may not result in huge drops in yields for long term Treasuries.
Probably the best way to express an opinion that stocks are too high is to simply buy put options, which are cheaper than usual since stocks have gone up so much that the market seems to have forgotten that stocks can also go down. The SP’s PE10 is 30, and is at the 99th percentile, tying with the bubble of 1929 and 2000. It is at the 3rd standard deviation, which is scary statistic. A normal PE10 should be half of that, implying a 1,500 SP index, half of the current price.
Short selling is very risky since the best shorting candidates are insanely bubbly companies where their bubble can get even bigger to go to an even more absurdly high price. Short sellers have to pay to borrow a stock and reimburse the lender for their lost dividend, thus shorting can have a very expensive carrying cost.
The admirers of gold claim that if the funds generated in QE were to leak into the economy that this would cause inflation, but they can’t leak any more than the chance that a Billionaire will give you a significant portion of his wealth. The QE funds are trapped in the accounts of wealthy investors who sold bonds to the Fed; then these investors used it to buy other investments (trading with other affluent investors who don’t need to spend down assets for living expenses) and thus the holders of QE cash didn’t spend the newly printed money on consumption. Thus the gold admirers theory that all the QE funds will somehow go into consumption causing inflation, and in turn causing a giant surge in gold prices, is unlikely.
The danger investors face is if they fall in love with gold and claim it is OK to buy at any price they may make mistakes and overpay and miss out on other opportunities.
Perhaps the federal budget deficit will get bigger after the next two recessions some 11 years from now to the point where the government tries to have far too much of its spending from simply monetizing the debt. But first we have to go through two big recessions which would provoke the authorities to engage in massive deficit fueled stimulus.
Much of the concern with the federal budget is either pensions or Medicare for people over age 65. If people decide to keep working a long time and are using an employer’s insurance this will lighten the burden on Medicare and Social Security. As people move into sophisticated office jobs and away from simple blue collar work then working many years may be more acceptable. Retirement at age 65 or younger may be a necessity for blue collar workers but many professionals enjoy working for a long time in order to get intellectual stimulation. If this happens then the federal deficit will get less worse and the gold admirers may tire of yieldless assets, that cost a small amount to hold, while their friends earn a few percent on bonds. Assuming the economy backs away from negative yields, after the next recession, this will act to draw attention away from gold and toward other assets.
Investors need independent financial advice about the risks of using gold and Treasuries to hedge against a stock market crash.