Could Rising Interest Rates Derail The Economic Recovery?

Now that an economic recovery appears likely, the markets have a new bogey-man they’re concerned about—Higher Interest Rates. In the government’s attempt to finance the economic recovery by selling billions of dollars of debt, interest rates have been steadily climbing of late. In fact, the resulting selloff in Treasury prices has not only pushed up their yields, but pushed up the all-important mortgage rates as well. This is already slowing down mortgage applications once again.

Another reason Treasury yields are rising may be because the market is anticipating positive economic growth in the second half of this year, coupled with a concern about inflation thanks to the huge increase in supply over the next two years owing to the growing budget deficit.

Finally, the purchase of T-bills by the central banks of Japan and China has also been considered a reason for the rise in intermediate and longer-term rates as well. They are creating money domestically and buying T-bills with it. They are doing this to keep down the price of their currencies in relation to the dollar which subsidizes exports. This monetary policy creates demand for dollar-denominated short-term U.S. government debt, which lowers the T-bill interest rate because the seller (the U.S. Treasury) can offer to pay a lower rate and still get buyers. Some then conclude that intermediate and longer-term interest rates rise because the economy is then likely to improve.

So what are some of the consequences that higher rates could have on consumers and the economy? If Treasuries continue to sink, then many equities will likely follow. Rising long term interest rates would stifle both the housing recovery, corporate profitability and the overall economy.

But In the long run, the huge government borrowing and money printing undertaken in the quest to right the economy may make sense. Amid a severe downturn, the Fed must do everything it can to counteract it, namely by expanding its program of buying Treasuries.

So what can members do to profit in a rising-rate environment? Historically, commodities such as precious metals and energy, as well as stocks linked to these commodities have fared the best. Below is a list of commodity-linked stocks members may wish to keep on their radars.

Oil / Energy Stocks

Adventure Energy (ADVE) — a development stage company that intends to explore, develop, and produce oil and natural gas properties in the Appalachian Basin, primarily in Morgan County, Kentucky and Wayne County, West Virginia. The company focuses on the drilling and acquisition of proven developed and underdeveloped proprieties, as well as on the enhancement and development of these properties.

American Petro-hunter, Inc. (AAPH) – The company focuses in locating and assessing potential acquisition targets, including real property, oil and gas rights, and oil and gas companies.

Powershares DB Crude Oil Double Long ETN (DXO) — The investment seeks to track the price and yield performance, before fees and expenses, 200% of the daily return of the Deutsche Bank
Liquid Commodity index – Optimum Yield Oil Excess Return. The fund allows investors to take a leveraged view on the performance of crude oil

Gold & Mining Stocks

Uranium Hunter Corp. (URHN) – an exploration company primarily targeting the uranium and precious metal industries in the resource sector. Initially, the Company was founded with the focus of developing a portfolio of quality uranium exploration properties in East Africa. With the recent shift in economic conditions, management has decided to diversify the Company’s interests to include the precious metals industry.

Nevada Gold Holdings, Inc (NGHI) – Nevada Gold Holdings, Inc., through its subsidiary, Nevada Gold Enterprises, Inc., engages in the exploration and development of gold mines. It holds interest in Tempo Mineral Prospect located in Austin, Nevada.

Proshares Ultra Gold (UGL) – The investment will seek to replicate, net of expenses, twice the performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective.