MONEY CALL-Bernanke's call helps clarify investing moves

Thu Apr 28, 2011 4:58pm EDT

* Investors see further dollar slide even as QE2 ends

* Gold, silver to benefit further from loose Fed policy

* Bond fund investors go shorter for eventual tightening

By Aaron Pressman

BOSTON (Reuters) - Federal Reserve chairman Ben Bernanke spoke this week with the kind of reserve expected of a central banker -- but for investors looking for cues on what next for U.S. rate policy his view spoke volumes.

Gold lurched higher, the dollar continued to slip, making a new three-year low, while stocks and bonds rose.

What caused the ruckus? After all, most market players had anticipated the Fed's announcement that it would end its bond buying program known as QE2 on schedule in June.

But Bernanke made clear that, with the Fed's lowered expectations for economic growth, he was in no hurry to raise rates. And the Fed's vast bond holdings won't be sold down any time soon, either, he said.

Inflation is not enough of a threat to remove the punch bowl of easy money, Bernanke signaled. Just don't look for it to get any larger.

His placid view put the vulnerable dollar under even more selling pressure, and gives financial advisers room to maneuver without an imminent tightening when QE2 ends in June. WEAK DOLLAR BETS

Continuing the bond buying and holding rates close to zero is a recipe for further dollar weakness and rising precious metals prices, investors and analysts said. Investors globally have found more appealing -- and higher yielding -- currencies to buy. The weaker dollar, and fears of potentially much higher inflation, feed gold's appeal.

Gold prices, which hit a nominal record on Wednesday before Bernanke began speaking, continued to rise as the Fed chairman spoke to reporters in Washington. Spot gold reached $1,535.90 on Thursday, again a nominal record (adjusted for inflation gold's 1980 high of $873 equates to about $2,368 today). [ID:nLDE73R0X1]

"After listening to Bernanke, I think what's been benefiting the precious metals isn't likely to change," Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, said. "The Federal Reserve is going to continue on its accommodative ways and they're not going to allow a run-off of securities on their balance sheet." INFLATION PROTECTION

The Fed chairman's words will heighten the fears of investors worried about a sharp increase in inflation, Luschini said. Along with precious metals and other commodities, he recommended real estate investment trusts and Treasury Inflation Protected Securities.

The SPDR Gold Trust exchange-traded fund (GLD.P) touched $150 for the first time on Thursday. The fund is up 2.5 percent over the past two days.

Vanguard's REIT ETF (VNQ.P) is up about 2 percent over the past two days and the iShares Barclays TIPS Bond Fund (TIP.P) is unchanged.

"Sell the dollar and buy a basket of currencies, including gold," Axel Merk, president of Merk Investments in Palo Alto, California, said. "Why take on corporate, credit or interest risk when the Fed's policies are reflected in this rather directly?"

The PowerShares DB US Dollar Index Bearish ETF (UDN.P), which bets against the dollar in favor of the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc, is up 0.7 percent over the past two days. FIXED INCOME

With Fed rate hikes on hold indefinitely, some bond fund managers said investors could safely venture into higher-risk fixed income to boost yield.

"The markets that are going to really feel the best in the fixed-income space are those that will offer more yield," Ray Humphrey, senior portfolio manager at Hartford Investment Management in Hartford, Connecticut, said. "With a zero interest-rate policy, investors are given an incentive to take on more risk to get more yield."

Humphrey favored investment grade, high yield "junk" and emerging market bonds.

The WisdomTree Emerging Markets Local Debt fund (ELD.P) and the Market Vectors Emerging Markets Local Currency Bond fund (EMLC.P) own emerging market bonds denominated in their home currencies. SHORTENING DURATION

Some investors, such as Bill Gross at PIMCO, the world's biggest bond fund manager, have predicted a bond market sell-off when the Fed finally does step out of the picture and ceases buying securities completely.

A Treasury sell-off, particularly in long-term bonds, could hit well before then, warned Alan Wilde, head of fixed-income and currency at Baring Asset Management in London. Just a few signals from the Fed that the end is near could zap the market and advisers say it's good to be prepared.

"Investor positioning has become too extreme on the permanency of low rates and sub-trend growth," Wilde said. "The Treasury market is vulnerable to a dose of tougher inflation fighting rhetoric."

To minimize losses in such a scenario, fund investors should consider shifting to shorter-term securities, Standard & Poor's equity analyst Michael Souers said.

The Vanguard Short-Term Federal Fund (VSGBX.O), which sticks mainly to U.S. Treasuries of one to three year maturities, has strong track record and an expense ratio of only 0.22 percent, just one-quarter the category average, Souers said.

The Dreyfus Bond Market Index Fund (DBIRX.O) also has a strong long-term record and low expenses. It invests in a broader array of debt and offers an above-average yield of almost 3 percent, he said.

(Reporting by Aaron Pressman in Boston and Steven Johnson, Nick Olivari and Ellen Freilich in New York)(Editing by Jennifer Ablan and Richard Satran))