有关爱情的事例:Seek Safety in Gold and Silver Before Reckoni...

Collapse in Bonds

There is a set of clear and dangerous factors shaping up that could wreak havoc on the prices of US Treasury bonds in the rest of 2011. Briefly, the budget of the federal government is strained after two rounds of massive stimulus packages, sending the debt and deficit burden to unprecedented levels while the Federal Reserve’s quantitative easing is set to end. With interest rates still at almost zero, inflation is set to take off and force Treasury yields up with it. Such high yields on US Treasuries and greatly reduced demand for the bonds will lead to a collapse in prices in the market. Overall, the prospects for US debt securities are not appealing.

From the middle of the recession up until now, the Treasury has had a willing partner in the Federal Reserve, which is buying hundreds of billions of dollars in T-bonds. The mass purchase program, known as quantitative easing, or QE2, as it is the second year of the policy, has the Fed taking over two-thirds of the debt issued by the Treasury. As you can see from the 20-year bond index (TLT), extra demand has artificially propped up bond prices, but it can’t last forever – the program ends on June 30 with no signal of a “QE3” being implemented. That means in the latter part of 2011, there will still be a lot of US debt floating around with a significantly reduced buyer market.

At the same time, the Fed is stuck in a balancing act. The purpose of the QE2 policy was to combat deflation that would further damage the economy, while the pull back now is meant to avoid excessive inflation. However, with the interest rate still at practically 0% and so much cheap stimulus money in the economy that has not been spent, the likely scenario is that inflation will rise rapidly in the next year. For Treasury bonds to remain a viable asset, yields on T-bonds will have to rise to meet inflation. That equation, ultimately, will cause the sharp decline in the present value of bonds and a collapse in bond prices in the near future.

It’s possible to make a play on the decline in bond prices if you pick up shares of the inverse 20-year bond index (TBT). This carries a unique set of risks because the primary driver of a price increase in this market will be inflation, which diminishes real returns. In other words, an investor in TBT would earn dollars as the value of dollars decreases and would face a related rates problem that is difficult to optimize. A more detailed explanation of this issue and a helpful graph is located here.

Dim Prospects for Stocks

With fall of the Dow Jones (DIA) below 12,000 along with the deterioration of the S&P500 (SPY) and NASDAQ (QQQ) throughout the past six weeks, there is plenty of evidence that the stock market in general has not been and will not hold up very well either. Poor economic data with regard to housing and consumer prices is putting a damper on growth estimates. The US government’s policies meant to spark job creation and a new economic boom are not working out as intended and whispers of a double dip recession are becoming hard to ignore.

As recently as April, the market was quite bullish with financial headlines citing consumer confidence gains, booming global demand, and expectations for even greater highs. Then, along came the economic reports that indicated otherwise. Numbers on jobs were still disappointingly bleak; the latest unemployment figure rose to 9.1% and hiring numbers missed estimates by over 50%. Home prices continued to fall, tumbling below lows in 2009, as the supply of houses on the market far exceeded the number of people who wanted to or were even able to buy one. Even worse, the Consumer Price Index continued to rise, increasing 0.2% in May, with the core CPI jumping 0.3% for the biggest increase since July of 2008. This sets up a vicious cycle of stagflation where sales and demand deflate further because of inflation, only to cause job creation to slow even more. Growth becomes stunted, and it will take an expensive combination of fiscal and monetary policy to climb out of that mess.

There are also analysts who are predicting a crash based on valuations of the market. Yale economist Robert Shiller has popularized a ratio called cyclically adjusted price-earnings that divides the S&P 500’s price by the average inflation adjusted earnings during the last 10 years. By this metric, stocks in the S&P are trading 44% above the mean ratio and equities in general should still be considered expensive. Analysts who believe government stimulus efforts are only inflating the economy see this as a signal that markets will crash back down as earnings revert to what they should be.

Perhaps the stock market is hanging on because of momentum, as investors who witnessed the roaring bull of early 2011 still want to seek out a few more profits. Or perhaps, the difficulty of the US economic situation has not been fully grasped and accounted for. Either way, the markets are due for another correction, more significant than what we’ve seen so far, and it will be difficult to avoid.

Gold and Silver Still Glitter

When growth starts to look difficult and government debt is becoming a problem, it’s the perfect opportunity to start safeguarding earnings by turning to precious metals. Gold and silver assets are the leading investments for times of uncertainty because they hold their value across time. If inflation starts rising, gold and silver will keep up in price and the real value of the investment will not suffer. Similarly, when the currency of the US or other nations weaken because of political and economic turmoil, gold becomes a safe haven because the assets will still retain value, even if there is a total economic collapse. Thus, as political problems accumulate and the markets start looking weak, demand and prices for gold and silver will rise even more.

To get gold into your portfolio, look toward ETFs that hold gold and stocks of the mining companies that sell gold. The most popular ETP, SPDR Gold Shares (GLD), holds gold and replicates the performance of gold bullion on the market, minus expenses and fees. Funds like GLD, Silver Wheaton (SLW) and iShares Silver Trust (SLV) offer a fairly direct way of investing in gold and silver without having to actually own and store the physical metals.

Another way of investing in gold and silver is through the mining companies that produce and sell gold and silver. Firms like Goldcorp Inc. (GG), Newmont Mining Corp. (NEM), Yamana Gold, Inc. (AUY), and Barrick Gold Corporation (ABX) generate profits that rise and fall depending on market prices for gold. Freeport-McMoRan (FCX) does the same across gold and silver. For these companies, the variation in the prices of precious metals affects their margins and amplifies the changes accordingly, making the stocks more volatile. On the other hand, since these are companies with the associated costs and management needs, their stocks can be evaluated with techniques more similar to those used with normal stocks. Straddling the line between the funds and the mining companies, is the Gold Miners ETF (GDX) that replicates the performance of the NYSE Arca Gold Miners index and provides lower volatility.

Although gold-based securities are not at a low, they are undervalued relative to the current stock and bond market, which has seen its prices rise on bullish speculation. Some even make the case that gold securities are undervalued relative to the true value of gold. Just as the equities markets face a correction in the near future, so do gold funds and companies – only gold will be shifting upward instead.

There are a few other strategies that can help investors hedge against these downturns. If you believe in Virgil, then fortune favors the bold and the S&P500 Shorts (SDS) could be valuable as a bet against the market. Right now, the S&P is nearing its 200-day moving average and testing lower levels of support. If it fails to find support at its former March 2011 low of 1249, expect the S&P to make a sharp decline and, inversely, for SDS to have some tremendous upside.

Additionally, pay attention to the volatility in the market with the Chicago Board Options Exchange volatility index, or VIX. This week, the VIX surged to above its long-term average, showing the growing worries in the market. Since investors are notably loss-averse as opposed to risk-averse, periods of sharp losses tend to create high volatility. Some instruments available to act on such volatility are the VIX Short-Term Futures (VXX), VIX Long-Term Futures (VXZ), and C-Tracks Citi Volatility Index (CVOL). It is important to note that these products are ETNs and do not actually track the VIX; rather investors can use them to hedge against future periods of sharp losses during brief volatility spikes. There’s more info here on what these instruments do and how they can help diversify a portfolio.

While one can argue that gold and silver stocks are not necessarily cheap right now, it is worth holding them as safeguards during the tumultuous period that 2011 is shaping up to be. Economic signs indicate a weak stock market and possible collapse in the bond market, and while the fear and uncertainty in the economy drives up demand for precious metals, portfolios holding gold and silver will at least allow some peace of mind, if not some great returns. Similarly, although instruments like SDS and VXX have risks different from normal securities, they are good hedges to consider because they can create value from uncommon situations. For a value investor seeking a good deal, these assets are valuable tools that can help extricate positive returns from the rest of the market when nothing else will.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.