Safehaven | Long Term Bonds: A Dangerous Investment To Own

April 20, 2006

Long Term Bonds: A Dangerous Investment To Own
by Jan Allen

Summary Statement:

Those holding long term bonds, especially long term government bonds, are experiencing a rapid dilution of their wealth. A sound investment alternative to bonds is a gold base portfolio.

1) Those holding long term government bonds during March 2006, experienced a very negative total rate of return as can be seen when one examines the performance of iShares Lehman 20+ Year Treasury Bond, Symbol TLT, which is an ETF based upon long term government bonds,

On March 1-2006, TLT paid a dividend of $0.32 based upon a share price of $90.14 and then on April 3-2006 paid a dividend of $0.328 on a share price of $86.57 http://finance.yahoo.com/q/hp?s=TLT&a=02&b=1&c=2006&d=03&e=3&f=2006&g=d

By holding TLT, for the month of March 2006, one earned $0.328 interest on a share price of $86.57 yet lost principle of $3.57 on one's original $90.14 investment.

The loss of principle in just one month was 3.96% of ones investment ($3.57 divided by $90.14).

2) Those invested in the contrarian-bond Rydex Juno (Symbol RYJUX) during March 2006, experienced a 5.68 percent return.

By holding, RYJUX for the month of March 2006, one's investment rose from $18.64 to $19.70, that is, a rise of $1.06 which represents a rise of 5.68 percent in one month based on one's investment of $18.64. http://finance.yahoo.com/q/hp?s=RYJUX&a=02&b=1&c=2006&d=03&e=3&f=2006&g=d

3) A graph of RYJUX vs TLT http://finance.yahoo.com/q/bc?t=3m&s=RYJUX&l=on&z=m&q=l&c=tlt as of April 17, 2006 for the 90 day period of January 17, 2006 to April 17, 2006 shows long term government bond holders lost 8% of their wealth in just 90 days while investors in the contrarian-bond fund Rydex Juno increased their wealth by 12%.

4) Those holding corporate bonds are fairing better than those holding long-term government bonds, but nevertheless, corporate bond holders are experiencing a dilution of their wealth as well.

LQW, iShares GS $ InvesTop Corporate Bond, is an ETF based upon long term corporate bonds.

The graph of LQW versus TLT, shows that long term corporate bonds decreased 4% compared to 8% for long term government bonds for the period of January 17th, 2006 to April 17th, 2006. http://finance.yahoo.com/q/bc?t=3m&s=LQD&l=on&z=m&q=l&c=TLT

5) An investment alternative to bonds is a gold base portfolio. There exists three sound ways of investing in gold:

1) The first, Gold based ETFs (Exchange Traded Funds): These increase with a price rise of gold. ETFs are funds, that is, investment funds like mutual funds, whose value corresponds to the underlying value of a group of stocks or a commodity. For example there is the SPY whose value is based upon the S&P 500; and GLD and IAU whose value are based upon gold.

streetTRACKS Gold Shares; Publicly traded symbol is GLD
http://www.streettracksgoldshares.com/index.php?noMsg=true

2) The second, pooled ownership of gold:

Kitco Pool Account
http://online.kitco.com/sellprice/selling.html

3) Third, one's gold stored in a vault:

Bullion Vault
http://www.bullionvault.com

Jan Allen
Prospering Bear

Jan Allen is an analyst and journalist with Prospering Bear, a website providing thoughtful information on how to prosper in the coming Bear financial market
http://my.opera.com/prosperingbear/blog/.