Uncertainty over the resolution of the fiscal cliff and related potential tax hikes are making most investors nervous. Many of them are selling stocks to avoid the potential rise in taxes next year and seeking refuge in “safe-haven” assets.
While it is most likely that the policymakers will reach some sort of compromise to avoid the cliff; an early resolution does not appear likely at present. (Three ETFs for the Fiscal Cliff)
Continued problems in the Euro-zone and weak corporate earnings in the U.S. are further adding to the investors’ worries. As a result the stocks fell to their three-month low yesterday, while the "safe-haven" assets have risen during the same period.
Despite very low or even negative real returns; the investors continue to pour money into the treasuries. Further, the minutes of the Federal Reserve’s last meeting indicate that it would probably announce a new program of long-term bond purchases in December when the Operation Twist expires. So, while the treasuries may be very risky for long-term investors, they may be a good shorter-term trade.
Barclays 20 Year Treasury Bond Fund (TLT) which measures the performance of longer-term U.S. Treasuries is up about 5% in the last three months and more than 50% in the last three years.
Gold (GLD) is back in focus due to fiscal cliff issue and continued monetary expansion, up about 8% in the last three months. With its bull-run lasting more than a decade, some people think that gold prices may be in a bubble but as a matter of fact, the inflation adjusted prices are still below the highs reached in the 1980s and the long-term investment case for gold remains intact.
Among the currencies, the dollar and the yen have attracted investors’ attention, but the safe-haven demand for the US dollar is somewhat offset by the expectation that the Fed may be ready to take further action again to counter the negative impact of the fiscal cliff on the US economy. Deutsche Bank USD Index ETF (UUP) is down 2% in the last three months, but it is up more than 2% in the last one month.
Which of the above (treasuries, gold or the dollar) is poised to benefit most from the “flight-to-safety” trades?
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