2 Asset Classes To Avoid As Reason Begins To Prevail

Includes: GLD, QQQ, SLV, SPY, TLT
by: BubbleBustInvesting

For the last four years, US Treasuries and precious metals had everything going their way, attracting the interest of momentum investors chasing the moon - but they have been parting paths recently. In the last year, iShares Barclays 20+ Year Treasury Bond (TLT) gained close to 25 percent, compared to roughly 8 percent gain for SPDR S&P 500 (SPY), 18 percent for NASDAQ PowerShares (QQQ), 17 percent for SPDR Gold Shares (GLD), and roughly -12 percent decline for iShares Silver (SLV).

Following the release of the Fed minutes on Tuesday afternoon, which suggested that Q3 might not be on the table anytime soon, both asset categories sold sharply. Does it mean that the precious metals rally is over? Should investors avoid precious metals altogether, or even go short?

As we wrote in a previous piece investors should avoid buying precious metals and U.S. Treasuries, as a fast run-up and weak fundamentals make these two trades exceptionally risky.

Here is why:

Gold and Silver. Both metals have been the investment of choice for investors who see all kinds of contradictory economic calamities hitting the world economy, from hyperinflation to hyper deflation, to the collapse of the dollar. Deflation? But deflation is about declining commodity prices, and gold is a commodity. Why should it be a hedge against deflation? Should we remind investors what happened to gold prices in the 1990s when the Japanese economy slid to deflation, and during political calamities, the collapse of financial institutions and sovereign nations. Do all these sound rational?

U.S. Treasuries. U.S. Treasuries have also been the investment of choice irrespective of the state of the economy, for all sorts of reasons: Some are buying US Treasuries as a refuge from the European turmoil, while others because they cannot find anything else to buy. Never mind that S&P downgraded US Treasuries and Moody's has them on its watching list. The Fed is ready to always be on the other side of every sell trade. Does it sound rational?

The bottom line: Bubbles can blow as long as a large crowd can chase after an asset with emotions rather than with fundamentals, but they all burst when reason prevails over emotion. Conservative investors should stay away from all three trades. Aggressive investors may consider building positions on the short side.

Disclosure: I am short SLV, GLD, SPY, TLT.

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