Wednesday 23 May 2012

Gold or Bunds?

Just in case we were not quite sure that the entire global financial markets are at present completely 'blue screen' borked, along comes a reminder. Germany has sold 2 year bunds at 0% yield. That's right you get your money back after 2 years. Even more bizarre, they offered 4.5 billion euros worth and had demand for 7.75 billion euro's worth.

All this reminds me of the traditional saying that decries gold bugs:

"Gold has no yield, it can't be an asset class."

So now German bunds are in fact Gold. Those pieces of paper that have been bought this morning have the same inherent value as gold. This is quite an achievement for the Government of Germany. Not only have they managed to get a weak euro but their borrowing rates are also at an all time low.

For Germany today, truly it is a Goldilocks scenario.

Less so of course if you happen to be a citizen of virtually any other European country, but no matter.

So, what do we think, in 2 years time what asset will prove to have been better value:

100 euro of Gold or 100 euro of 0% German bunds.

Gold has been off recently and many are calling the end of the great bull market. On the other hand, the price of these bunds can only go one way in theory. Which would you opt for?


andrew said...

Investors are buying an option on the DM V2.0

If you take the view that there is a ~15% chance of total EUR dissolution in < 2 years, and if this happens, the DM V2.0 will be priced at ~ old EUR * 1.30 initially,

0.30 * 0.15 = 0.045 ~ 2.2% pa

and the uk 5-10 year yeild is 1.51%

... profit!

hovis said...

Call me a lover of barbarous relics but physical gold thanks.

rwendland said...

Interesting to draw a parallel between Germany<->EU and South East England <-> Rest of UK.

Were it not for the relative decline of the Rest of UK, would the pound be much stronger and the South East & UK Banking less prosperous?

Phil said...

Do the bonds actually specify what happens in the event of Germany exiting the €? Investors won't be very happy if the Bundesbank decides to leave them as €-bunds if they have the option to do so...

CityUnslicker said...

Super point Phil. Or indeed, if it is Germany who exits the Euro in a huff rather than kicking others out...who knows what effect that would have and what the repricing would be on the day.

CityUnslicker said...

Super point Phil. Or indeed, if it is Germany who exits the Euro in a huff rather than kicking others out...who knows what effect that would have and what the repricing would be on the day.

Budgie said...

The over borrowing in the south of the eurozone happened because the infamous "one-size-[doesn't]-fit-all" interest rate operated on all eurozone economies at different points in their economic cycles.

Modern economies use the bank rate as a regulator. The euro rate has been primarily set to suit Germany's economic cycle. The Greeks, and others, were hung out to dry.

Budgie said...

The SE benefits from the London tax take. All the main taxes (NIC, IT, VAT, Duty) are paid by the entire country to London. Where some of it promptly sticks to the hands of all the government employees there.

You thought government was 100% efficient? On a capitalist blog? The 'inefficient' part stays in London. It is bad enough that the rest of the country (the SW, NW, NE, Midlands, Wales, Scotland) subsidises London and the SE, without having to put up with the smug whinges therefrom.

BlackRaven said...

the bund is the 10yr, the bobl the 5yr and the schatz the 2yr.

budgie have you been smoking crack?

hovis said...

Budgie 10.12 - indeed, that is why there have been ( never to be implemented) suggestions from time to time to switch the political/ administrative capital of England / UK (however it remains cionstituted away from London which would still benefit from location and city. On this how about the old cities that have played at being capital in tha past - York, Bristol and a more modern one Birmigham(for centrality not the accent of its citizens!)

hatfield girl said...

'Which would you opt for?'

Gold, of course. Preferably formed into necklaces, bracelets, brooches, earrings; gilding, goblets, salt cellars, and crowns. I'll forgo teeth and taps.

Gold - so versatile - and recoverable after use to be used again and again. Bunds are bits of paper, au fond, incapable, too, of generating all those interesting aspects of kula.

measured said...

Completely different risk profile. I don't deny gold looks attractive as it's fallen $400 but that's point; you can lose on gold and it can be stolen. Pay your money and take your choice. I'm your kinda girl that prefers a decent equity like eBay.