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IPFS News Link • Gold and Silver

What Happens to Gold When Bonds Are No Longer a Safe Haven?

•, By Clint Siegner

The truth is finally dawning on this crowd. There is more than one way for the U.S. to default.

The government might not welch on payments, though the chances of that certainly aren't zero. It can surreptitiously default through inflation. What's more, the risk of that type of default is 100% – it is happening now and figures to get worse.

Investors traditionally turn to bonds when there is economic uncertainty. Most retirees have been coached to overweight bonds to reduce volatility and risk in their portfolios. The past couple years have delivered a wakeup call.

2022 was the worst year ever in the Treasury market. The 10-year yield jumped a full 2%. This year the carnage could be even worse as the bond bear market intensifies.

Banks and other financial institutions look at Treasuries as the ultimate collateral and as a Tier 1 reserve asset. But they, too, are getting a jolt of reality.

Small and mid-tier banks have been decimated by losses on the bonds held on their balance sheets.

The Federal Reserve implemented a backdoor bailout of those banks earlier this year.

Fed officials created their "Bank Term Funding Program" to allow member banks to borrow against underwater bonds at 100 cents on the dollar rather than book losses on their actual market value. It's an alternative to the fire sale of those deeply underwater assets to raise liquidity.

The loans have a 1-year term and the program was intended as a short-term measure.