By Kevin Grewal
Despite a slower than expected GDP reading, there are still signs that an accelerated economic recovery will emerge, having many investors betting that inflation will soon loom.
According to Merrill Lynch & Co.’s Treasury Master Index, Treasuries are expected to have their first down year in a decade, which is an indicator that investors are expecting prices to rise. This is the complete opposite of what was witnessed during the most recent financial meltdown when Treasuries gained an average of 14% and investors anticipated prices to decline.
To further support the notion of inflation, Treasury Yield curves have been widening to record levels. Most recently, the difference between 2-and 10- year Treasury note yields jumped to 281.4 basis points, from the 145 basis points at the beginning of the year. Additionally, the yield on the benchmark 10-year note reached its highest level since mid-August.
The last indicator that prices are set to rise comes from the most recent data on wholesale prices. The producer price index, or PPI, outpaced economist’s expectations by jumping 1.8% in November and many believe that consumer prices, or the CPI, will follow.
From an investors’ perspective protection from inflation can be found in the following equities:
• the SPDR Gold Shares (GLD), which has been attracting assets at record levels, both due to fears of inflation and a weakening dollar. GLD is up 34% from a January low of $79.79 to close at $106.95 on Monday.
• the iShares Barclays TIPS Bond (TIP), which adjusts its returns based on increases and decreases of the CPI. TIP is up 8% from a March low of $96.48 to close at $104.55 on Monday and boasts a yield of 3.38%.
• the Materials Select Sector SPDR (XLB), which is relatively resistant to inflationary pressures. XLB is up 80% from a March low of $18.08 to close at $32.46 on Monday.
Although these ETFs offer protection against inflation, it is equally important to understand the inherent risks that are involved in them. To help mitigate these risks having an exit strategy is of importance. According to the latest data at http://www.SmartStops.net, the price points at which an uptrend in these ETFs may come to an end are: GLD at $105.03; TIP at $103.93; XLB at $31.16. Keep in mind that these price points fluctuate with market conditions and updated data can be found at http://www.SmartStops.net.