John Hussman: Precious Metals Remain Very Favorable

Excerpt from the Hussman Funds' Weekly Market Comment (2/25/08):

As of last week, the Market Climate for stocks remained characterized by unfavorable valuations and unfavorable market action, holding the Strategic Growth Fund to a fully hedged investment stance. I have no particular expectations regarding near term market prospects, given that stocks are neither overbought or oversold presently. Given the average amount of time that the market has historically spent to consolidate oversold conditions of the sort we observed in January, my impression is that downside risks could increase as we move into March, but such impressions don't influence our investment positions...

In bonds, the Market Climate remains characterized by unfavorable yield levels and relatively neutral market action. Though yields have moved higher in recent weeks, they are still considerably lower than they would be without a “flight to safety” effect. That's not to say that investors won't continue that flight to safety in the near term – only that they've priced bonds to deliver unsustainably low long-term returns. Since it's likely that we will continue to observe both relatively weak economic news combined with periodic upward inflation surprises, I would still anticipate a “sawtooth” trading range – gradual downward pressure on yields driven by continued economic deterioration, punctuated by upward spikes primarily on inflation data. The Strategic Total Return Fund has a particularly short duration of about one year at present, with a bit more than 20% of assets in precious metals shares, where the Market Climate remains very favorable on our measures.

Editor's note: Relevant sector ETFs include the PowerShares DB Precious Metals Fund ETF (DBP), streetTRACKS Gold Shares ETF (GLD), iShares COMEX Gold Trust ETF (IAU), iShares Silver Trust ETF (SLV), and Van Eck Market Vectors Gold Miners ETF (GDX). See also the full list of sector ETFs.