The Safest Investment Right Now

The Safest Investment Right Now… And It’s Not International Stocks Or Gold

by Mark Skousen, Chairman, Investment U
Monday, May 22, 2006: Issue #537

And renouncing illusions,
Find peace and content,
In that simplest, sublimist of truths,
Six per cent!

- Nicholas Biddle, President of the Second Bank of the United States

I just returned from the Las Vegas Money Show, and I made the case for the wisest, safest investment right now. Are you ready? Cash!

How’s that? Well…

Treasury bills are yielding 4.5%
One-month bank CDs are yielding 5.04%
And the best money market funds are now paying 4.7%
Prime rate funds, whose monthly dividends are linked to the prime rate, are now yielding close to 8%. [Take a look at Van Kampen Senior Income Fund (NYSE: VVR), yielding 8.1%.]

I asked the thousands of investors in Las Vegas: Which is a better bet right now: stocks (or gold) that pay little or no dividends, or earning 5% in a no-risk money market fund? Or 8% in a low-risk prime rate fund?

Why Cash Is the Safest Investment Choice

More and more investors are choosing cash, CDs and prime rate funds. And why not? Professor Charles R. Nelson from the University of Washington did a study many years ago showing that rising inflation is the #1 factor hurting stocks. As long as inflation is rising, it may pay to be in cash for a while.

Several years ago, nobody in his right mind kept money in cash, which was paying close to 1% in 2003. But with the Fed raising short-term rates 16 times in a row, the return on risk-free investments is getting to be worthwhile. Take a look at the three-month Treasury rates since 2000.

Investments 2006: 3-month Treasury Bill Rate

Are Ben Bernanke and the Fed Poised To Raise Rates To 6%?

Given the jump in the Consumer Price Index (0.6%) in April, Wall Street now expects Bennie and the Fed to raise rates again next month. And Marilyn Cohen, a Forbes columnist on bonds, even suggested the possibility that the Fed will raise rates to 6% to contain inflation.

Many investors at the Money Show were dismayed that gold, the ultimate inflation hedge, dropped on the news of increasing inflation. “Gold should be going through the roof,” one anxious attendee told me. “Why is gold falling?”

Investors need to understand a basic principle of finance: Prices reflect the future, not the present! And what is the gold price telling us? For the past three years, it has been moving up sharply because “war is inflationary” (don’t ever forget this truth). Gold doubled in price in the last year because it was saying that inflation is on the rise.

The Consumer Price Index reflects prices at the final retail stage. Ben Bernanke and the Fed now realize that they have to get tough on inflation, and that means a tight money policy. Gold does well in an easy money environment, but not well during tight money.

So, gold has been falling in the past week. I don’t think it’s the end of the bull market in gold, commodities and stocks, but it does mean a serious correction. Whether gold, commodities and stocks continue to rise depends on Fed policy, Middle East politics and the Asian boom. My bet is that inflation will continue to be a problem, which bodes well for cash as a best-class investment.

Good investing, AEIOU,

MarkToday’s Investment U Crib Sheet

I mentioned that Ben Bernanke and the Fed will have their hands full taming inflation. Take a look at Investment U # 531, Leading Economic Indicators: The #1 Indicator the Fed Fears the Most, to see why gold is the best measure of future price inflation, dollar weakness and interest rates.