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Safety trades outperformed in the third quarter—here's what could lie ahead

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Time to get defensive? Here's what 2 experts say is ahead for Q4

Safety trades are topping the tape.

Long-term Treasury bonds, gold, utilities and consumer staples saw outsized gains in the third quarter, outperforming the broader equity market's more than 1% gain.

The iShares 20+ Year Treasury Bond ETF (TLT) gained nearly 8%, while the GraniteShares Gold Trust (BAR), which tracks physical gold, climbed 5%. The Utilities Select Sector SPDR Fund (XLU) was up almost 9%, closely followed by the Consumer Staples Select Sector SPDR Fund, up about 6%.

Compared with the quarter's biggest losers — which included more cyclical sectors like energy, materials and retail — the gains in these groups suggest investors are embracing more defensive positioning amid widespread global uncertainty.

"People are obviously gearing up" for some kind of bigger risks, Tim Seymour, founder and chief investment officer of Seymour Asset Management, said Monday on CNBC's "ETF Edge."

"Palladium [is] at record highs," Seymour said. "The gold-silver ratio has been something that investors have been loving to play in here, and I think it makes a lot of sense that the ETFs have had traction."

The gold-silver ratio refers to the amount of silver required to buy one ounce of gold. Traders can leverage this ratio when it is outside its average range to profit from the discrepancy.

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Safety trades get a boost in the third quarter—what experts see ahead for Q4

And while much of this defensive positioning is tied to U.S.-China trade tensions and rising recession risks in Europe, a lot of it also has to do with the path of both domestic and international interest rates, experts say.

"The more that the Fed cuts rates, the more attractive gold as a zero-yielding asset class becomes," Jay Jacobs, head of research and strategy and senior vice president at Global X ETFs, said in the same "ETF Edge" interview.

That rings especially true in Europe, where gold's yield appears to be positive relative to the euro zone's negative-yielding interest rates, Jacobs said.

"And it's not just gold. It's silver. It's other precious metals where people like the defensive properties," Jacobs said. "If interest rates aren't paying anything, it doesn't hurt that much to hold gold or silver."

Will Rhind, founder and CEO of GraniteShares — the firm behind the BAR gold ETF — doubled down on this notion.

"Interest rates are coming down across the world," he said in the same "ETF Edge" interview. "That's not a great thing for anybody in the fixed income market, but for those looking for more defensive positioning, gold is something that's really benefited from that, [with] China trade talks [and] broader uncertainty just helping along that story."

"When you have $18 trillion worth of government bonds around the world yielding less than zero or yielding less than gold, the opportunity cost of holding gold only increases," Rhind added.

However, on a technical basis, gold's trajectory may not be as solid as others believe, warned Seymour, who also appears as a regular trader on CNBC's "Fast Money."

"Gold took three, four years to consolidate through a level that had been major, major resistance," he said. "The one caveat to this ... is if you have this sense that we may have had that blow-off top — and I'm not necessarily making that call — in August, in terms of rates, [when] we got to those lows, I think that's going to be a headwind for gold in the short term."

And rates may very well have gotten "ahead of themselves," Seymour said.

"My view is that if you look at the [purchasing managers indexes] and the leading indicators and all the macro around the world, it tells you that rates probably need to go lower," he said. "The question is how far ahead of the market did yield curves around the world get?"

BAR and TLT were up less than 1% midmorning Tuesday.

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