Gold and U.S. Bonds the New Great Trade?

by William Briat
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Submitted by William Briat as part of our contributors program.

Gold and U.S. Bonds the New Great Trade?

There’s uncertainty on the stock market. Troubles are coming from the emerging markets, and they are causing investors to panic and sell their stocks. We see they are scared. But as this is happening, there’s a trade in the making, and those investors who have raised some cash (as I’ve been suggesting my readers do) and are looking to park their money somewhere safer than stocks can profit from this opportunity.

The trade I’m talking about is the trade that’s happening in U.S. bonds and gold bullion—some call this phenomenon a “flight to safety.” I call it a potential opportunity.

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We know bonds and gold bullion are one of those asset classes where investors rush to when the risks on the stock market increase. This is something we are seeing now, and it could continue for some time.

In the following chart, I have plotted the prices of U.S. bonds (red line), gold bullion (black line), and the S&P 500 (green line). Take a look at the circled area, which shows the movement out of stocks.

Chart courtesy of www.StockCharts.com

Since the beginning of the year, U.S. bonds and gold bullion prices have increased in value, while the stocks have fallen. We have seen this relationship before as well. A prime example of this is the stock market sell-off in 2009; we saw investors rush to gold bullion and bonds then in hopes of finding safety.

It’s not too late for investors to consider taking advantage of this shift by looking at exchange-traded funds (ETFs), like iShares 20+ Year Treasury Bond (NYSEArca/TLT). Through this ETF, investors can invest in long-term U.S. bonds and profit as their prices appreciate. They may also look into ETFs like the SPDR Gold Shares (NYSEArca/GLD) to take advantage of the rise in gold bullion prices. If investors want leveraged returns from gold bullion prices, they may want to take a look at Market Vectors Gold Miners ETF (NYSEArca/GDX). This ETF tracks the performance of companies that produce gold bullion.

Why do I say it isn’t too late for investors to profit? Because I believe this flight to safety from stocks to U.S. bonds and gold bullion will continue. The main reason I expect this to continue is because there isn’t really a clear direction as to where the global economy, especially the emerging markets, are headed next.

For example, the emerging markets are still in a debacle since the Federal Reserve started to taper its quantitative easing. Back when the monetary easing started, the trade was to borrow from the U.S. and go invest in the emerging markets. This flood of money created troubles, and now there are questions about whether it can come back without causing damage. We have seen currencies of emerging markets deteriorate very quickly, including the Turkish lira, South African rand, and Russian ruble, just to name a few. So as the Fed tapers, these problems could grow, sending more stock market investors to the exits.

Remember, dear reader, that proper portfolio management goes a long way. You have to keep in mind that things can change very quickly, and this trade that’s currently in the making can vanish into thin air. Manage your risks through ETFs and portfolio diversification, and don’t overexpose your portfolio to just one asset class.

This article Gold and U.S. Bonds the New Great Trade? was originally published at Daily Gains Letter

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