SEEKING ALPHA.COM
April 28, 2009
After the Battle of Waterloo in 1815 when Britain, Austria and Germany beat Napoleon, the House of Rothschild made the equivalent of more than a billion dollars today by selling their gold and buying up bonds, precisely the reverse of the strategy they are probably employing now.
What happened in 1815 was that the Rothschilds had accumulated vast amounts of gold because they thought that with Napoleon back there would be a long war. The defeat of Napoleon therefore looked like a financial disaster for them as the price of gold would plummet without soldiers to pay.
But the patriarch Nathaniel Rothschild turned this strategic error to their advantage by swiftly buying up bonds – which had become depressed in price – and selling their gold. The gold price fell and bonds recovered sharply as the government no longer needed to keep issuing more of them to finance the war.
Buy gold, sell bonds
Now in modern markets, it is striking that exactly the reverse trade applies. Governments all over the world are about to flood the bond markets with paper to finance their bank bailouts and economic stimulus plans, and the final bill could amount to more than $6 trillion on some estimates and very much higher for a full derivatives rescue plan.
In effect the governments are about to need to raise the funds to fight another Napoleon. This massive new supply of bonds will depress the price of existing bonds, and indeed this is evident in the recent fall in 10-year bond prices and their rising yield.
Inflation of the money supply we also know to be a natural enemy of bonds which pay a fixed coupon and are thus extremely sensitive to any rise of inflation that will swiftly erode the coupon, and even make it negative in real terms. And we know governments all over the world have embarked on massive money creation. This can not be good news for bonds, although in the short term the brief return of deflation will help them.
Gold and inflation
On the other hand, inflation is the friend of gold because it has an almost fixed supply, and silver might well be better still as its supply is even tighter. Gold prices are also still relatively depressed compared to other commodity price movements over the past three decades, and silver is probably the most depressed commodity price of all.
Thus the modern Rothschilds might well be counselled to reverse their Waterloo bet and sell bonds and buy gold and silver. Timing is always a devil in financial markets – and the reversal of the recent bear market rally in stocks would give bonds another short lease of life – but getting the fundamentals right also works. That is how the Rothschilds made a billion after Waterloo.
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