Two Ways to Play Hard Assets As Rates Rise

06/11/2009 11:30 am EST


Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says rates are rising as the dollar falls, and he recommends investors hold only tangible assets.

The 30-year long Treasury bond has been in a bear trend for the entire year. As long-term interest rates move higher and the Federal Reserve continues to hold down the short end over the next year or so, the yield curve will get steeper. Consequently, interest rates on the ten-year bond will continue to move higher as well. As the ten-year moves higher, mortgage rates will also move higher since they are, to some extent, geared off the ten-year Treasury bond.

As the housing market writhes and the economy gasps for air, foreign holders of US dollars are becoming less excited about recycling their dollar hordes back into our Treasury bonds. Instead, our dollar-rich foreign friends have been using their reserves to buy gold (real money), enhance their militaries, stockpile raw materials and other commodities, improve their infrastructures, and strengthen their domestic currencies. I firmly believe that China has serious long-term plans to see the yuan as a world reserve currency, and they will have to offer gold backing eventually to accomplish that feat.

The dollar’s hegemony is on the way out. The US Dollar Index dropped below 80 last month, and the dynamics of the current decline is beginning to accelerate. I doubt the Fed is comfortable with the speed at which this is happening, so we should expect them to intervene to avoid a rout. Nevertheless, intervention is always a short- term solution. 

There is a bright spot:  A cheap dollar is good for coal exports, regardless of President Obama’s carbon-tax plans. AllianceResource Partners LP (Nasdaq: ARLP) has been doing quite well since March. Let’s gamble on a brief dollar bounce that will likely be accompanied by some profit taking in Alliance and see if we can’t buy some at $34.50 or better. The indicated yield at $34.50 is about 8%. (It closed Wednesday at around $38.50—Editor.)

You should be holding only tangible assets and no financial assets. My favorite asset classes are gold and energy. Your next major opportunity will be to take advantage of the current rally to raise cash by selling any financials you still hold: These would be any assets not advantaged by higher commodity prices. For a diversified, pure commodity investment, consider the Pimco Commodity Real Return Strategy Fund (PCRAX).

The fund invests in a group of commodity futures contracts constructed to reflect the DJ AIG Commodity Futures Index. The risk is abated by eliminating the leverage inherent in commodity futures by paying for the contracts in full with interest-bearing securities. This provides a diversified commodity position as well as a bit of a yield. I am raising the buy price to $6.50. (It closed Wednesday just below $7.50—Editor.)

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