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After a strong rally from late December 2008 through January 3, 2009, high yield bond prices have declined 20% and have repriced a Great Depression as they did in November-December. HYG is attractive here, even though in 2009, it has trailed investment-grade (LQD), foreign (GIM) and inflation-indexed (TIP) bonds.
Treasury notes rallied recently partly because the British government has begun a policy to purchase its government and corporate bonds, which fueled speculation that the U.S. would too. Government suppression of rates is temporal. U.S. Treasury notes are expected to rise to near 5% over the next 6 to 12 months.
Figure 9 has not been updated since it was constructed on February 27. Closing below the November 2008 lows on a month-end basis was very bearish in relation to price and timing. Month-end closing lows are more significant than weekly or daily readings. Since then, the S&P has plunged another 7.3% on high volume.
Most investors view gold as an inflation hedge. Historically it has been a storehouse of value during times of inflation and currency devaluation. Gold rose with the dollar during the Great Depression as long as the dollar's conversion to gold was stable. President Roosevelt debased the dollar by reducing its conversion rate to gold on April 18, 1933. By July 1933, the dollar had declined by about 40% against the British pound. By the end of 1933, virtually all countries had devalued, and an economic recovery began.
Since today's dollar has no ties to gold, when economic growth rates collapse as they did in the fall of 2008, gold declines and the dollar rallies as foreign dollar debts are called. This negative correlation lasts as long as global investors are confident that the remedy for declining growth rates and stock prices does not entail severe currency devaluation. Figures 10 depicts the recent negative relationship between gold (GLD) and gold stocks (GDX) to the dollar (UUP). It was mostly negative until mid-December 2008. Since then, it has been quite positive. Between GLD and GDX, GLD is the best hedge against currency devaluation.
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