Safe-Haven ETFs Ahead Of The Fiscal Cliff

Includes: GLD, IAU, IEF, TLT, UUP
by: Tom Lydon

The U.S. fiscal cliff is worrying investors as they try to best navigate the markets and exchange traded funds before hundreds of billions of dollars in tax increases and spending cuts.

If Capitol Hill does not come to a consensus on the fiscal cliff, over $600 billion in tax hikes and spending cuts could lead to greater job loss and push the economy into a recession.

According to the Tax Policy Center, if all the scheduled tax increases occur, the average household would have to pay an extra $3,4000 next year as income rates rise 3 to 5 percentage points, writes Rick Newman for U.S. News.

Bob Holt for New Jersey News Room reports that the initial $503 in cuts through the next September would lead to a 0.5% economic contraction next year as millions of jobs are lost.

However, some believe that Congress will compromise to avoid spending cuts and tax hikes.

""No one in their right mind would push our country into recession," Mohamed El-Erian, chief executive officer at Pimco, said in a Bloomberg report, predicting a 70% chance that U.S. lawmakers will come to a compromise. "The major issue for us is not that we resolve the fiscal cliff but do we do it in a way that allows Washington to pivot to turning headwinds into tailwinds."

Senate Budget Committee Chairman Kent Conrad, North Dakota Democrat, believes lawmakers will come to a "framework agreement" on tax and spending to create a broad deal next year, reports Laura Litvan for Bloomberg. Senator Bob Corker, Tennessee Republican, also agrees that there is little chance of automatic policies kicking in and that Republicans are open to compromise.

"I absolutely believe there is room for agreement," Conrad said in the article.

Nevertheless, investors have kept an eye on Treasuries heading into the fiscal cliff as the ultimate safe-haven asset. Currently, the benchmark 10-year Treasury notes are yielding about 1.60%.

  • iShares Barclays 7-10 Year Treasury Bond Fund (NYSEARCA:IEF)
  • iShares Barclays 20 Year Treasury Bond Fund (NYSEARCA:TLT)

Similarly, the U.S. dollar has been strengthening as global investors take a greater interest in U.S. Treasuries - international investors would have to exchange their domestic currencies for greenbacks and the greater demand would help the U.S. dollar appreciate.

  • Powershares DB US Dollar Bullish Fund ETF (NYSEARCA:UUP)

While the U.S. dollar and gold have traditionally moved in opposite direction - a weaker dollar makes it cheaper to buy U.S.-denominated gold overseas, gold could maintain its safe-haven status going into the fiscal cliff.

"The gold price is up because of a combination of the outlook for an expansionary U.S. monetary policy and fears over the 'fiscal cliff'," Eugen Weinberg, global head of commodities research at Germany's Commerzbank, said in a Reuters article.

  • SPDR Gold Trust (NYSEARCA:GLD)
  • iShares Gold Trust (NYSEARCA:IAU)

Max Chen contributed to this article.

Disclosure: I am long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Tom Lydon's clients own GLD.