* 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 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).
"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."
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)
"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
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.
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
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
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,
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))