Guest Post by Chris MacIntosh
The mainstream framing, “flight to safety,” “China is riskier so Treasuries yield more,” has it arse backwards.
Safety in a bond market doesn’t mean “the government is more trustworthy.” It means “I can get my real purchasing power back at maturity.” On that measure, the US isn’t winning.
It’s the government that has to pay the most to convince anyone to wait ten years for repayment, in a currency it can print at will, from a fiscal position with no credible path to stabilisation.
Now, the market has finally started questioning that risk premium. The countries and asset classes on the other side of that spread aren’t riskier. They’re simply not the ones being asked to pay for forty years of accumulated fiscal decisions all at once.
Consensus has been wrong about it every step of the way. In May 2022, one of the more prominent talking heads on Twitter/X summed up the mainstream trade of the moment in four words. “Buy bonds, wear diamonds.”
Bonds were the safe, boring, consensus trade. Yields had backed up a bit, so the reasoning went, and it was time to lock in duration. Diamonds were the implied hard-asset hedge — the tangible store of value you’d pair with paper.
Both halves of that trade have been an unmitigated disaster.
Since that post, long-duration Treasuries have been in one of the worst bear markets in bond market history. The 30-year yield has gone from the mid-single digits at the time straight through the 2001 high and on to a 25-year peak above 5.6%, which means anyone who took the “safe” advice and bought duration in 2022 has been sitting on brutal, ongoing mark-to-market losses for three years running.
And diamonds, the supposed hard-asset hedge, haven’t held value either. The diamond price index is down nearly 50% from that post.
Source: IDEX
The takeaway here is that not everything shiny is a hard asset in the sense that matters.
Diamonds have no monetary history, no central bank buyer, and — critically — an elastic supply now when a lab can grow a stone that’s indistinguishable from a mined one.
Gold has none of those problems. Farmland, energy, cattle, productive real estate? None of those problems either. The mainstream trade got that entire trade completely wrong (and with total confidence). I guess that’s how consensus typically works.
We made this exact point back in 2014, long before either half of that trade blew up. The diamond business was being propped up by manufactured scarcity, engineered by a cartel, and a century of advertising. This created a price floor for something that isn’t rare and isn’t liquid. We compared diamonds to the very asset class this piece opened with:
Keep in mind this was written in 2014. Japanese, US, and European government bonds were still trading like the safest instruments on earth. Diamonds were still an undisputed store of value.
Both perceptions have since cracked, in exactly the order and for exactly the reasons we described. Value that rests on perception rather than scarcity or cash flow holds right up until the moment perception changes… and then it folds like a cheap IKEA chair.
We picked the thread back up in September 2023 as the crack was actually widening in real time.
By then, lab-grown diamonds — physically identical stones grown in a matter of weeks — had moved well past the cheap gift-giving segment and into the crucial US bridal market.
De Beers had been charging roughly $1,400 a carat for select makeable diamonds in June 2022. By July 2023, that had fallen to about $850 a carat — a decline of nearly 40% in just over a year, with more room to fall since those stones were still trading roughly 10% above the secondary market where traders and manufacturers dealt among themselves. Our 2014 thesis had been playing out for the better part of a decade, right through to the near-50% decline.
It also brings up another distinction — a diamond is just a chunk of coal that did well under pressure — and our long-standing preference has run toward coal (rather than diamonds), for exactly the reasons we outlined above.
The dynamics are opposite. ESG-driven divestment has been strangling coal supply for years while demand hasn’t budged. Think of it as unmanufactured scarcity — supply constrained by woke politics and capital flight, rather than a cartel’s marketing budget.
With diamonds, it’s the exact opposite. As we’ve seen over the past years, supply is near limited only by a lab’s manufacturing capacity. And that’s why diamonds — unlike coal — didn’t pass the “hard asset test.”
Much like the whole “until it isn’t” moment we referenced a moment ago arrived for diamonds in stages (it took well over a decade since we laid out our thesis in 2014), it appears to be happening the same way for Western sovereign deb. Auction by auction, yield increase by yield increase — until the perception of safety and the reality finally collide.
Editor’s Note: The diamond bust offers a warning: a reputation for safety won’t protect your wealth when confidence breaks. With US debt mounting, investors need a plan for what a dollar crisis could bring.
Legendary investor Doug Casey’s free special report reveals three moves to help protect your wealth and prepare to profit—plus one stock he believes investors should consider before the crowd rushes in. Click here to get your free copy of How Investors Can Survive—and Profit From—the Coming Dollar Crisis.
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[ H/T The Burning Platform ]
The mainstream framing, “flight to safety,” “China is riskier so Treasuries yield more,” has it arse backwards.
Safety in a bond market doesn’t mean “the government is more trustworthy.” It means “I can get my real purchasing power back at maturity.” On that measure, the US isn’t winning.
It’s the government that has to pay the most to convince anyone to wait ten years for repayment, in a currency it can print at will, from a fiscal position with no credible path to stabilisation.
Now, the market has finally started questioning that risk premium. The countries and asset classes on the other side of that spread aren’t riskier. They’re simply not the ones being asked to pay for forty years of accumulated fiscal decisions all at once.
Consensus has been wrong about it every step of the way. In May 2022, one of the more prominent talking heads on Twitter/X summed up the mainstream trade of the moment in four words. “Buy bonds, wear diamonds.”
Bonds were the safe, boring, consensus trade. Yields had backed up a bit, so the reasoning went, and it was time to lock in duration. Diamonds were the implied hard-asset hedge — the tangible store of value you’d pair with paper.
Both halves of that trade have been an unmitigated disaster.
Since that post, long-duration Treasuries have been in one of the worst bear markets in bond market history. The 30-year yield has gone from the mid-single digits at the time straight through the 2001 high and on to a 25-year peak above 5.6%, which means anyone who took the “safe” advice and bought duration in 2022 has been sitting on brutal, ongoing mark-to-market losses for three years running.
And diamonds, the supposed hard-asset hedge, haven’t held value either. The diamond price index is down nearly 50% from that post.
The takeaway here is that not everything shiny is a hard asset in the sense that matters.
Diamonds have no monetary history, no central bank buyer, and — critically — an elastic supply now when a lab can grow a stone that’s indistinguishable from a mined one.
Gold has none of those problems. Farmland, energy, cattle, productive real estate? None of those problems either. The mainstream trade got that entire trade completely wrong (and with total confidence). I guess that’s how consensus typically works.
We made this exact point back in 2014, long before either half of that trade blew up. The diamond business was being propped up by manufactured scarcity, engineered by a cartel, and a century of advertising. This created a price floor for something that isn’t rare and isn’t liquid. We compared diamonds to the very asset class this piece opened with:
Keep in mind this was written in 2014. Japanese, US, and European government bonds were still trading like the safest instruments on earth. Diamonds were still an undisputed store of value.
Both perceptions have since cracked, in exactly the order and for exactly the reasons we described. Value that rests on perception rather than scarcity or cash flow holds right up until the moment perception changes… and then it folds like a cheap IKEA chair.
We picked the thread back up in September 2023 as the crack was actually widening in real time.
By then, lab-grown diamonds — physically identical stones grown in a matter of weeks — had moved well past the cheap gift-giving segment and into the crucial US bridal market.
De Beers had been charging roughly $1,400 a carat for select makeable diamonds in June 2022. By July 2023, that had fallen to about $850 a carat — a decline of nearly 40% in just over a year, with more room to fall since those stones were still trading roughly 10% above the secondary market where traders and manufacturers dealt among themselves. Our 2014 thesis had been playing out for the better part of a decade, right through to the near-50% decline.
It also brings up another distinction — a diamond is just a chunk of coal that did well under pressure — and our long-standing preference has run toward coal (rather than diamonds), for exactly the reasons we outlined above.
The dynamics are opposite. ESG-driven divestment has been strangling coal supply for years while demand hasn’t budged. Think of it as unmanufactured scarcity — supply constrained by woke politics and capital flight, rather than a cartel’s marketing budget.
With diamonds, it’s the exact opposite. As we’ve seen over the past years, supply is near limited only by a lab’s manufacturing capacity. And that’s why diamonds — unlike coal — didn’t pass the “hard asset test.”
Much like the whole “until it isn’t” moment we referenced a moment ago arrived for diamonds in stages (it took well over a decade since we laid out our thesis in 2014), it appears to be happening the same way for Western sovereign deb. Auction by auction, yield increase by yield increase — until the perception of safety and the reality finally collide.
Editor’s Note: The diamond bust offers a warning: a reputation for safety won’t protect your wealth when confidence breaks. With US debt mounting, investors need a plan for what a dollar crisis could bring.
Legendary investor Doug Casey’s free special report reveals three moves to help protect your wealth and prepare to profit—plus one stock he believes investors should consider before the crowd rushes in. Click here to get your free copy of How Investors Can Survive—and Profit From—the Coming Dollar Crisis.
Tweet
Continue reading...
[ H/T The Burning Platform ]
