The Regression of Risk: Gold, Treasury ETFs

As talking heads begin to discuss the potential end of the recession, there are many lessons to be learned about the last 18 months of economic slowdown. The lessons learned this time can better prepare investors for the future. Bubbles and market fallouts should be expected, and though rare, they do lend opportunity to the well timed investor.

Gold and Treasuries

Until last fall, investors never truly had as much interest in Treasury bonds as was seen during the credit crunch. Investors had previously fled equities as recessions loomed, but rarely did they fly into Treasury bonds. Previous recessions were marked by investors flooding into corporate debt to protect their wealth, and Treasuries were out of the question for all but the most paranoid investors.

Gold's run was particularly interesting; global turbulence in the financial markets and the fear of deflation actually sent gold higher, which makes little rational economic sense. Gold should have dropped during a deflationary period, as investors typically buy gold to protect from inflation – not deflation.

The Next Step

As with any market catastrophe, investors start dumping risk, and they move into “safe” investments. Knowing what is understood now about investor interest in Treasuries and how they responded to a credit crisis lends credibility to the idea that for all future recessions, Treasuries will be the safe haven choice. Any future economic crisis will without a doubt send investors fleeing back to treasuries and to even “safer” investments like gold.

Munis Should Appreciate ETFs

Outside of exchange-traded funds, investors had very little interest in municipal bonds, as shown by the spread between corporate debt yields and muni yields. With many localities facing issues with raising cash, primarily from slumping real estate values, investors were disinterested at best. Without the easy access that exchange-traded funds offered, there was little hope that many localities, especially in California, would be able to raise much needed cash.

With its soaring popularity during the recession, exchange-traded funds will certainly continue to play an important role in how investors do business in the coming months to years. ETFs have secured a place in every portfolio as investors again think about the cost of carry, as well as the importance of diversification.

Disclosure: Author owns nothing related.

Comments

[altaman:]

The next down leg in the market will also cause money to seek safer havens. However, I think that this time Treasuries will not be preceived as very safe given their huge revision to mean lately and the obvious inflation to come that will drive rates beyond their 2008 highs over 4%. Perhaps gold investments will be twice as attractive this time around.

May 07 12:45 PM

[RG2009:]

I agree with you. I still believe Gold had interesting things in store by the end of 2009 and beyond.

May 07 12:49 PM

[Prudent Man...:]

Evidently this guy has been around very long. Where was he in the seventies on his mommy's lap when you could get 18% on Treasuries.

One must drill into ETFs, especially inelastic bond funds where the insiders have a tremendous unregulated advantage over the investor which isn't to say it is all bad but must be realized if you are serious about risk.

May 10 01:21 PM