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A Time for Bullion and Yield

06/30/2010 1:21 pm EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Forecasts & Strategies, suggests precious metals and a high-yielding mortgage REIT as hedges against more financial turmoil.

Gold, the ultimate hedge against crisis and fiscal misconduct, is not only is making new highs at more than $1,200 an ounce, but also is making front-page news. Last month, The New York Times ran a major article, not in its business pages, but on the cover: “Financial Uncertainty Restores Glitter to an Old Refuge, Gold.” The reporter pointed out that Glenn Beck isn’t the only one touting gold—so are billionaire hedge fund traders John Paulson and George Soros.

Soros is smart and doesn’t let his political agenda interfere with his investment acumen. He’s not a gold bug, but he’s buying gold because it has been a great speculation, quadrupling in value since 2000 (while the stock market has fallen 13%). And now we’ve learned that central banks are net buyers of gold for the first time in decades. They, too, are worried about the future of our fragile monetary system.

We have [several] positions in natural resources. SPDR Gold Trust (NYSE: GLD), which invests 100% in gold bullion, increased again last month. So did the iShares Silver Trust (NYSE: SLV), which invests 100% in silver bullion. There’s still plenty of uncertainty out there, and unemployment is staying way too high. Gold and silver are the ultimate hedges against troublesome times.

Last month, mortgage real estate investment trust (REIT) Annaly Capital Management (NYSE: NLY) (15.6% yield) announced a jump in non-GAAP core earnings and a 12% rise in net interest income. Consequently, Annaly was able to raise its quarterly dividend from 65 cents to 68 cents. I expect this high-dividend policy to continue.

Annaly is able to pay out above-average dividends by leveraging (5.6 to one) its portfolio of mortgage-backed securities from Fannie Mae and Freddie Mac. There’s virtually no default risk on almost all of its investments, but there is interest-rate risk. The biggest worry is higher interest rates, but with unemployment still stubbornly high, and inflation low (the Consumer Price Index actually dropped in value last month), the Federal Reserve announced that it is likely to continue to keep rates low. Keep buying.

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