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Stock ETFs, Treasury Bond ETFs, Gold ETFs: How Can This Threesome Last?

10 September 2009 at 2:24 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Baffling. No… utterly shocking!

Is there a better way to describe the unlikely, unholy triumvirate between stocks, U.S. treasuries and gold? In what universe do all 3 asset classes show strong, positive correlations for a significant length of time?

Put another way, when diversification failed asset allocators in the credit collapse circa Sept – Nov 2008, U.S treasury bonds soared. Investors liquidated gold, corporate bonds, stocks, commodities… and they piled into U.S. treasuries for safety. In other words, stocks and gold traveled in the same direction, but¬†all 3 (i.e., stocks, gold and treasuries) did not¬†journey along¬†the same path.

Fast forward to the start of the cyclical bull rally for stocks in March of 2009. Here, stocks and gold rallied higher over the ensuing three months. Investors literally dumped their treasury bond holdings as the iShares 20+ U.S. Treasury Bond Fund (TLT) lost -10% in the 3-month span. Again, 2 of 3 moved in the same general direction, while all 3 did not.

Over the last 3 months, however, something¬†strange has occurred. The direction of all 3 asset classes — asset classes that typically show no resemblance to one another over time — have been moving in tandem.

3 Asset Classes, 3 Strange Months in 2009 (6/11-9/10)  
            3-Month %
             
U.S. Stocks (S&P 500 SPDR Trust SPY)     11.1%
U.S. Treasury Bonds (iShares 20+ Treasury TLT)    8.2%
Gold (SPDR Gold Trust GLD)       4.3%

 

One explanation that has some plausibility is the idea that sidelined cash is working its way back into every aspect of the market… from the least risky to the most risky.¬†It is possible that portfolios are being rebuilt from the ground up. Still, I’m not sure that I¬†can sign on to that explanation wholeheartedly.

People are buying stocks because they are afraid to miss out on recovering more of the money that they have lost. And gold is being added to hedge against U.S. dollar devaluation as well as inflation. In fact, stocks may also be purchased as a hedge against inflation.

However, other than the U.S. Federal Reserve, who is buying¬†30-year treasuries for a 4.2% yield? Not the Japanese. Not the Chinese. The primary buyers would be those who expect a stampede for a safe haven… because¬†4.2% is a low¬†payoff for the hold-n-hope risk involved.

So again, which of these 3 asset classes is about to “decouple” from an exceptionally improbable threesome? My best estimate here is that the bond market¬†will go its own way.

Specifically, if investors continue piling into treasuries, stock investors will be spooked by a perceived shift to safe haven purchasing. Treasury bond gains would eventually come at the expense of U.S. stocks and may even increase the uncertainty of the “hold gold” thinkers.

Conversely, if investors begin the long process of bidding farewell to U.S. treasuries, the stock market can continue to prosper from dip buying and an appetite for risk. Long bonds (20+) shouldn’t significantly hamper stock progress¬†until and unless the 30-year hits a 5.5% yield.

Right now, though, they’re all moving in the same direction. Go figure! And while you’re figuring… you may wish to¬†figure out¬†an actionable plan that takes China decision-making into consideration.

If you‚Äôd like to learn more about ETF investing‚Ķ¬†then tune into¬†‚ÄĚIn the Money With Gary Gordon.‚ÄĚ You can listen to the show ‚ÄúLIVE‚ÄĚ,¬†via podcast or on your iPod.

Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc.web site.

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One Response to “Stock ETFs, Treasury Bond ETFs, Gold ETFs: How Can This Threesome Last?”

  1. tim says:

    why is the US tradding fanny and jenny bonds for treasurys to the chinese??


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