Times of Uncertainty Mean Risk Hedges

Commodity News Center ^ | 10/1/09 | Christopher Laird

[h20skier66]

I can't think of a better way to describe the last 2 years than as times of great uncertainty. Not only did we have two near catastrophic banking failures worldwide, but we also have the ever present Iran Israel nuclear contention. The USD held reasonably well during this period, although it's weaker. In any case, gold has held up amazingly well over the period of the last two years too, in fact is at highs. What else is except US T bonds?

Pimco's Bill Gross just said the longer term of the US T yield curve is flattening and that suggests markets expect deflation to be an ongoing concern. He moved to 44% US T exposure as a result for his total return fund. Since that is often considered gold bearish what does this mean going forward? It is hard to hedge USD risk and gold risk at the same time.

The USD held up quite well during the last 2 years deleveraging - in the sense that it was around 70 on the US Dollar index USDX at its low about 1.5 yrs ago, and started climbing during the flight to liquidity (cash). US treasury bonds are at record low yields indicating that flight to cash is still very much in place. Money market funds are sitting on something like $2 trillion in cash at the moment (they also lost the US emergency guarantee recently). It is not safe just to sit in USD if you think there is deflation building because the USD is having major credibility problems. The GBP is in a lot of trouble too, and other central banks are still flooding out liquidity and lowering interest rates to just about 0. So what is a safe strategy?