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Gold Bulls, Bond Bears

In April 2011, we addressed whether it was still a good idea to invest in gold – trading at about $1,400 an ounce, at the time. The bullion price today is roughly $1,775 per ounce.

There are many currents influencing the price of this precious metal, so it’s helpful to check in with a market technician or analyst who follows trading patterns and momentum of a security’s price, to find out whether gold’s rally still has legs.

Andrew Cardwell, a Philadelphia native, runs a technical trading outfit called Cardwell RSI Edge, and he predicts that gold’s upward trend will continue well into 2013.

“People are not sure of paper money,” he says in an interview. His analysis signals that gold hit an important technical price level of $1,790 per ounce recently, a level that showed it has momentum to continue higher. His target for next year is $2,100 per ounce by June 2013.

In addition, a fundamental money manager concurred there are broad economic reasons to continue holding gold.

“When an investor buys a gold exchange-traded fund, like GLD (SPDR Gold Shares) or IAU (iShares Gold Trust), he may be thinking only of a speculative trade. But given the size of the total gold holdings in ETFs and their turnover, it appears that a growing number of investors are adding to a personal hoard of gold ETFs as a way to store value in other than a domestic currency,” said David Kotok, chairman and chief investment officer of Cumberland Advisors.

The amount of gold backing up the precious metal that is being traded through exchange-traded funds now exceeds 2,500 tons and is still growing, Kotok explained. Very few countries hold that much gold, and the central banks in the U.S. and other countries will continue to buy gold, he said.

Bond bears

Harry Clark, a registered investment adviser from Gladwyne, predicts the bull market in bonds is over, despite what could be continued ups and downs in bond prices.

“We just came through a 30-year bull market in bonds, with yields falling from over 12 percent to 1.5 percent. That bull market is over.”

What investors need to understand is that when rates move, bond prices respond accordingly, he says. When interest rates rise – even by 1 percent from near zero currently – bond prices should drop almost immediately. In the case of long-term Treasury bonds, for instance, those bond prices might fall almost 20 percent in value.

“I believe this past July or August was the peak. In general, interest rates can’t go much lower, and we’re going to be in a bond bear market,” Clark said. “That’s bad for investors,” who have plowed billions of dollars into fixed income in the past few years as they sickened of the stock market’s volatility and steep losses. Fidelity just last week disclosed its client money in fixed-income assets surpassed that in stocks.

“Investors aren’t used to seeing their bond prices go down. But eventually all the money [the Federal Reserve] is printing has to cause inflation, and interest rates will go up,” Clark said.

Clark oversees $3 billion in assets and is sticking with high-yield bond mutual funds and exchange-traded funds such as SPDR Barclays Capital High Yield Bond ETF (symbol: JNK). He also has raised the cash levels in his client portfolios to 20 percent.

Kotok agrees the Fed is engineering inflation in the coming years as part of its economic recovery effort. “The United States continues to run federal budget deficits at high percentages of GDP,” Kotok said. “The U.S. central bank has a policy of QE (quantitative easing) and has committed itself to an extension of the period during which it will preserve this expansive policy … now estimated to be at least three years,” Kotok said.

“The central bank has specifically said it wants more inflation. The real interest rates in U.S. dollar-denominated Treasury debt are negative. This is a recipe for a weaker dollar. The only reason that the dollar is not much weaker is that the other major central banks are engaged in similar policies.”

Read more: http://www.philly.com/philly/columnists/erin_arvedlund/20121002_Your_Money__Analysts_remain_bullish_on_gold__bearish_on_bonds.html#ixzz28jzBLzkN

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