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Everyone knew it would happen... The
debt deal was nowhere near good enough to get out from under a credit rating
downgrade.
So what happens now?
Some analysts don't think much will
change, and that might be a dangerous position to take.
Writing for MarketWatch,
Jeff Reeves, editor of InvestorPlace.com, said, "The stock market will
continue the correction that began two weeks ago. And Treasury bonds, strangely enough, will
remain a safe haven for investors."
But we don't think T-bills are a safe
haven at all.
Last Thursday Joey McBrennan,
editor of Taipan Daily, wrote, "Mr. Gross is one of the largest investors in government
debt. When he turns his back on the U.S., you know it's time to start paying
attention."
And just how does Bill Gross, CEO of
PIMCO, the largest bond investor, feel about Treasuries?
If the Treasury is borrowing money
from you or PIMCO at 0.5 percent for the next six
months and CPI inflation is averaging 3 percent,
then lenders, savers are being shortchanged beyond
even rather egregious historical examples. [Inflation] puts more money in
government coffers to pay their bills and less money in your pocket to pay
yours.
In fact, he's not buying U.S.
Treasuries at all.
McBrennan reports
Gross is focused on bonds from Canada, Mexico, Brazil and Germany.
That means that some investors might
find the iShares International
Inflation-Linked Bond Fund (ITIP:NYSE)
an interesting investment. This exchange-traded fund holds bonds from all
four of the countries Gross recommends.
The thing is,
ITIP also holds bonds from other countries, like Greece and Italy. While
these bonds have higher yields, their governments are also flirting with
defaults.
You could also check out the PowerShares Emerging Markets Sovereign Debt ETF
(PCY:NYSE).
This portfolio of bonds included countries like Indonesia, Turkey, Russia and
Qatar, among others.
Either way, these bond funds are slow
burners. They will probably give you a higher gain than U.S. Treasuries,
especially after you account for inflation... But
don't expect them to light a fire under your portfolio.
For that, it looks like precious
metals hold the key.
What a surprise, eh?
Here's why...
The one thing Jeff Reeves said that we
agree with is that the stock market correction will continue.
The S&P downgrade will not stop with the
U.S.' credit rating... This will trickle down into major companies that
depend on U.S. Treasuries -- like banks that use T-bills as collateral for
their risky positions.
What that means is that banks are
still holding risky investments in the derivatives market. These banks might
be forced to back those investments with more Treasuries. Why? Because these
Treasuries will be worth less with a downgraded rating.
As a result, Standard & Poor's
will probably down grade a lot of companies. Reuters suggests that mortgage
finance companies Fannie Mae and Freddie Mac, the Options Clearing Corp. and
the Depository Trust Co. are on the chopping block today.
This kind of ripple effect is pushing
gold and other precious metals through the roof.
After the slight pullback (which was
smaller than we predicted), gold futures shot up to just under $1,700 an
ounce when the Far Eastern markets opened.
We think this is a far safer
investment than Treasuries.
Take a look at gold, silver and
platinum over the past year.
Gold is in black, platinum is in blue,
and silver is in green. Just look at those gains over the past year in gold
and silver! Gold's even about to overtake platinum prices, even though
platinum is about 30 times more rare than gold.
That's how scared investors are...
That's how popular gold is as portfolio protection.
I'm not going against these folks --
we've been telling you to buy gold for more than a year. But I also have to
maintain that gold is "going plaid."
If you've ever seen the movie Spaceballs, you'll understand this reference. In
this Star Wars parody, the villain's ship shifts into "ludicrous
speed" while chasing the hero of the movie. The result of screeching
through space at ludicrous speed is that the ship leaves a trail of plaid in
its wake.
Gold is moving at ludicrous speed
right now, and it's about to push through its long-term
bull channel that I told you about last Thursday.
Gold traders have to be very careful
here. Once these major trendlines are broken, a new
trend will have to be established.
Many times when a stock or asset
breaks above a long-term trend, prices drop back to re-test that trendline. This does two things: It tests the momentum of
the breakout, and it establishes support for higher prices.
These two things depend on each other.
The breakout will gain momentum once it finds support.
Here's what that looks like.
Of course, gold prices haven't
breached that top trendline yet. There's still a
chance that gold prices will pull back a bit from these levels.
That means folks who are already in
gold should protect their gains with tighter stop-losses. Those
whoaren't in gold could buy on a pullback here.
But should
prices break higher, keep this in mind: Breakouts that start new trends often
pull back to find support. Prudent investors would either wait for support
before buying or set a stop-loss just below that support point in case it
doesn't hold.
Sara Nunnally
Taipan Publishing Group
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