Betting Against Bonds and Shunning Gold

06/28/2007 12:00 am EST

Focus:

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of High Monthly Income and Successful Investing, says investors should avoid both fixed income and the yellow metal amid increased volatility and a minibear market in bonds.

The precipitous spike higher in bond yields of late has taken on a life of its own. Although rates have come back off their recent highs, the move toward higher long-term interest rates is definitely in full effect.

In light of this now established trend in bond yields, I want to put our money in a position where we can benefit. That's why I am recommending that you take a position in the Rydex Inverse Government Long Bond (RYJUX).

This inverse bond fund—formerly named Rydex Juno—seeks a total return, before expenses and costs, that corresponds to the inverse of the price movement of the 30-year Treasury bond. To put it another way, when bond prices go down, RYJUX goes up.

Our [investment in] RYJUX will allow us to capitalize on the rise in interest rates and the corresponding drop in bond prices. The rise in global bond yields forced us to sell our positions in the American Century International Bond fund (BEGBX), and the iShares Lehman 20+ Year Treasury Bond (AMEX: TLT).

[Investors should not] ignore the sell signal in bonds and keep a position in what now clearly can be described as a mini-bond bear.

This mini-bond bear, i.e. the widespread rise in interest rates, also has taken its toll on other interest-rate-sensitive sectors such as real estate and utilities. If you currently are allocated to either real estate stocks or utilities, make sure you set a stop loss to protect yourself against any more selling in the sector. Higher rates are having a pernicious effect on these once high-flying sectors.

[Meanwhile,] the tailspin in gold and precious metals over the past several trading sessions has now pushed our position in the streetTRACKS Gold (GLD) to a closing value below our preset stop loss of $64. (It closed below $64 Wednesday—Editor.)

As a result, I am recommending that you sell your allocation to GLD and/or any gold mutual fund alternatives you own. Place the proceeds into the money market (cash).

The market is making a lot of waves right now and it certainly appears that we haven't seen the last of the volatility that has characterized Wall Street over the past fortnight. Until we see things settle a bit more, we are going to hold off on making any new portfolio allocations.

In times of big price swings, the least turbulent place is the steady mooring of cash.

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