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[TTHQ Staff]

BEING STREET SMART
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Sy Harding


SAFE HAVENS ARE BACK IN STYLE! December 1, 2006.
Investor concerns are rising that the stock market may be running out of gas. However, gold and bonds have been in accelerating double-digit rallies. That should not be surprising, since both gold and bonds are the most popular ‘safe havens’ when economic, political, or currency uncertainties arise. And right now there seem to be uncertainties in all three areas.

Economic uncertainties are developing from increasing signs that the economy may be slowing into a harder landing than Wall Street is telling investors to expect. Political uncertainties have increased since the mid-term elections indicated the country wants change, while the form those changes might take are yet to be known. Currency uncertainties have popped up with the accelerated plunge in the U.S. dollar over recent weeks. The U.S. Dollar Index declined 32% against a representative ‘basket’ of international currencies between 2002 and 2005. It rallied back some in 2005. However, the downside resumed this year, and has accelerated over the last week or two. The dollar is now within striking distance of its all-time low, seen in 1992. That creates more than enough currency uncertainty.

While those uncertainties have been building, the price of gold has increased 15%, while gold stocks have rallied 18%, from their early October lows. That’s a quite satisfactory gain in less than two months, especially considering that the stock market, as measured by the S&P 500, has gained only 3%, and the Nasdaq 4%, during the same period.

Meanwhile, bonds, that other popular ‘safe haven’ in times of uncertainties, have also provided impressive gains. Many investors consider bonds to be too conservative, believing they should be held only by those looking for income, not capital gains. However, my favorite bond fund, the Rydex Government Long-bond Advantage fund, typical of many bond funds, has gained 17% since early May. (By the way, I just learned that in the latest issue of Timer Digest I am ranked the #5 Bond ‘Timer’ in the U.S. over the last 12 months).

Much of the support for bonds stems from bond-investor skepticism regarding Wall Street’s claims that the economy is only slowing modestly, into a ‘soft landing’ - from which it will begin growing again early next year. Bond investors have been paying more attention to economic reports since last spring, which showed a slowing economy even before the accelerating decline in the housing sector became so serious. The economy grew 5.6% in the 1st quarter of this year, 2.6% in the 2nd quarter and 2.2% in the 3rd quarter. The bond rally seems to be anticipating the slowing will continue, and force the Federal Reserve to soon begin cutting interest rates.

That could well happen. As I noted in this column three weeks ago, “The Fed has a history of letting itself get behind the curve in both directions. It was late in raising rates to slow the economy in 1999, which resulted in the over-heated economic and stock market bubble. It then raised rates too long and slowed the economy too much, into the 2001 recession. It then lowered rates too much, creating the real estate bubble and current record consumer debt. It then raised rates 13 times in a row, but so timidly that inflation got out of the bottle. Let’s hope it doesn’t wait too long to begin lowering rates in response to the worsening economic data”.

If it is to happen, the Fed should signal that possibility at its next FOMC meeting, which takes place December 12. (The Fed doesn’t like to surprise markets, so it tends to give some advance warning if a change in its monetary policy is likely soon).

Meanwhile, gold tends to move opposite to the U.S. dollar, so the current plunge in the dollar is probably one catalyst for this latest leg up in gold. Gold also moves with inflation, and perhaps the return of higher oil prices over the last two weeks has it factoring in that concern. There is also the possibility that the renewed rally in gold, which tends to move opposite to the stock market, is factoring in anticipation of a stock market correction.

In any event, investors need to be constantly aware that there are more opportunities in the market than just stocks. And in recent months gold and bonds have been providing much better gains than equities.



Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.