The trade of a lifetime: Treasuries and Gold
With recession and a global slowdown comes the need for investors to get smarter about the way they invest. The current market climate is unlike any we’ve seen in decades. Fortunately for the modern investor, this downturn brings many investing opportunities. In the past few days I’ve been all over DXO and SLX as excellent 2009 trading opportunities, but I believe the best investment and ultimate hedge is in this trade right here.
To understand why this trade works we have to have some fundamental understanding both of economics and fiscal policy by the Federal Reserve:
If you haven’t yet noticed, US Treasuries are paying the worst returns in decades. Investors flocked to treasuries to spare losses and for protection of large amounts of money. But now that rates are so low, why would you ever want to buy them? The 20 year treasury bond is currently paying just 3.22%. You’d never want to lock up your money for such a terrible return, especially for the course of 20 years.
But more importantly than individual investors are the foreign investors, both governments and institutions who hold trillions of dollars of the current national debt. Analysts expect that the national debt will be expanded by $2 Trillion in the fiscal year 2009, meaning $2 Trillion will have to come from the Federal Reserve or treasury issues to raise money.
Even worse is that 40% of the national debt owned by private investors will mature this year. That debt will likely be rolled over into longer term issues like the 20 and 30 year treasury, but investors are going to want more than 3% per year to secure that debt.
So what do you do about it?
TBT is all you need to know. TBT is an exchange traded fund that tracks the inverse value of the 20 and 30 year treasury bonds.
Because of the way Treasuries work, higher treasury prices mean lower yields while lower treasury prices mean higher prices. Right now Treasuries are extremely valuable even as the US Government has to borrow more and more money.
I think TBT and GLD make a perfect hedge, here is why:
There are three things that can happen when the US Government has to raise more money:
1.The Federal Reserve steps in to buy Treasuries
2.Investors demand higher returns for Treasuries
In these two scenarios inflation continues and gold keeps running higher. #1 will make you a ton of money with gold but little with TBT, while #2 will make you money on TBT with a relatively small change on the price of gold.
Either way, TBT should be a part of your portfolio right now. Treasury rates can’t stay this low for long, especially considering that $2 Trillion will have to be raised in the next year. Buy, buy, buy.
