Independent Investor: Precious Metals New Bull Trend
The recent price action in precious metals this past week convinces me that a new bull run in gold and silver is underway. For those investors who have yet to add some exposure to precious metals, now would be a good time.
That's not to say that these commodities will have a straight run higher from here. That would be too much to ask. There will be continual pullbacks in gold and silver. These corrections are usually sharp, fast and excruciatingly painful for those who are risk adverse. So if you don't have the stomach for volatility and turbulence, precious metals is not your cup of tea.
Back in May, gold and silver both hit my interim price targets of $1,250 an ounce of gold and $19.50 an ounce in silver. I then warned investors that there would be a period of consolidation.
"Wait for the pullback," I advised, "and then add or initiate new positions, but be prepared to wait. These commodities can back and fill for several months before resuming their move higher."
Fortunately, that scenario turned out to be accurate. I have been waiting patiently for both metals to decisively break above my interim price levels. I believe they did this week with gold reaching $1,275 an ounce and silver hitting $20.75 an ounce.
"So where do you see precious metals going?" asked one investor from Becket, who has a substantial holding in gold.
I believe gold can easily reach $1,350 an ounce before suffering another bout of consolidation. It could go higher, and I believe it will, but the timeframe depends upon a lot of variables that have no clear outcomes right now. In the case of silver, $30 to $36 an ounce is my ballpark estimate. Obviously silver has a substantially higher percentage gain ahead.
You would have to go way back to early 1980 to match the price of silver today. For those who were around back in the day, silver was in a huge run caused by two brothers, Nelson and William Hunt, along with a consortium of partners. At its peak, this silver pool owned more than 200 million ounces of silver. Its purpose was to buy silver as a hedge against inflation since at that time private citizens were prohibited from owning gold. The Hunt brothers cornered the market. The COMEX changed the rules and the Federal Reserve intervened in the market as well. The silver price collapsed and languished for well over two decades.
For many, precious metals offer a "safe haven" given the shaky state of the global economic recovery. At the same time, nearly every central bank in the world wants to prevent their currencies from gaining strength in order to facilitate increased exports. In addition, most governments have opted for an expansionary monetary policy in order to prevent deflation and kick start their economies.
I suspect that gold moved this week on a bet by speculators that the Federal Reserve will shortly stimulate the economy through additional quantitative easing. Investors are also betting that industrial demand for silver, as well as palladium and platinum, (which are also reaching new highs), will continue to increase in the future.
Investing in precious metals is risky, at best, but it's been the only game in town for investors lately. George Soros, the famed billionaire investor, recently warned that gold was the "ultimate bubble" and that "this is a period of great uncertainty so nothing is safe." I agree with that opinion. However when nothing is safe, a little gold is still better than no gold at all.
@theMarket: Is September's Rally Stalling or Pausing?
After opening the month with a 5 percent market melt-up, investors were expecting a follow-through this week that would take the averages higher. There was even talk of a possible break through the ceiling of this almost six-month trading range. Instead we only managed a couple point gain over last week's close on the S&P 500.
That was despite some "good" economic news on the unemployment front. Initial unemployment claims were down by 27,000 and continuing claims fell 2,000, the best in two months... The bears argue that not all states submitted employment numbers so optimistic estimates were used instead, in some cases. They also point out that once a person's unemployment runs out they are no longer officially counted as unemployed. The advance guard of this group (those who were left go early in the recession and still have not found a job) exhausted their extended benefits beginning in June. Unfortunately, as time goes bye, more and more unemployed Americans will fall into this category well into the middle of next year.
Over in euro land things were a bit dicier with increased concerns over European debt levels, problems with Anglo Irish Bank and the "news" that Europe's bank stress test understated lender's holdings of risky government debt. Readers may recall that I had grave reservations over this very same issue when the results were first announced weeks ago.
Most of the market's attention has turned to the Obama administration's non-stimulus, stimulus plan. That some Wall Street players got an advanced look at the administration's thinking was, in my opinion, the source of last week's rally. Now that we have the details, the markets seem to be decidedly unimpressed.
As readers recall, I explained that a good portion of the money from the first stimulus plan was deliberately held back until this summer in order to help the incumbent party get re-elected. That may have been a miscalculation on the part of the Democrats, who could have been overly confident of the economic impact of Stimulus One. To date, 77 percent of the $288 billion that was earmarked for tax benefits have been spent, only 53 percent of the $275 billion available for contracts, grants and loans has been distributed and only 64 percent of entitlements, or $144 billion out of $224 billion was doled out to the country. Obviously those levels of spending weren't enough to jump-start the economy or reduce unemployment and people (voters) are angry.
The Obama administration can read the polls as well as you or I. Since offense is always better than defense when running for re-election, the general consensus among Democrats is "we need more spending." The president's new initiatives could cost as much as $250 billion or $300 billion or slightly less than half the first stimulus plan. His agenda includes tax cuts for new business investments and R&D, $50 billion more spending on infrastructure and extending the Bush tax cuts for those Americans who make $200,000 or less ($250,000 if married).
It is not being called another stimulus plan because that might be seen as an admission that the first plan has failed. However on Friday, while addressing the nation on the economy and unemployment, the president did concede that "progress has been painfully slow." Wall Street is already discounting the package as too little, too late and they may be right. They are putting the blame squarely on the president and his party. And this country loves to find a scapegoat.
In the meantime, the markets continue to vacillate on low volume. I'm still expecting stocks to move a bit higher into the 1,130 level on the S&P 500. Only then will there be another opportunity to break out of this trading range decisively and re-take the higher ground. If stocks do succeed in breaking out, I am prepared to change my mind about my 950 S&P target level. But I'm not holding my breath.
The Independent Investor: Wheat, Weather & the Grocery Shelves
If you have been watching commodity prices over the last two months, you would think that the world's consumers are in for another escalation in food prices last seen in the summer of 2008. Yet, short-term movements in agricultural prices do not necessarily translate into higher food bills in the long term.
Much of the recent escalation in "soft commodities" like wheat, rice, coffee, corn and so on can be blamed on the weather. Readers may recall my columns "Weather and the World's Economies" and "What's the Price Tag of a Perfect Storm." In those articles, I explained how weather can impact prices of all sorts of things but especially commodities. This year's wheat crop is a good example of that.
This has been the hottest summer on record for us in the Northeast as well as other parts of the world. July was the hottest month in 150 years in Russia. By now, even if you live in Siberia, you are aware of the devastating drought within Russia, caused by that heat wave. The drought also sparked a series of fires that engulfed over 300,000 acres across seven regions. The weather and fires devastated that country's wheat crop. As a result, the government imposed an embargo on any further wheat exports, which account for 13 percent of global wheat exports.
Although the Russian wheat shortfall occupied the headlines, grain production has also suffered this summer because of severe flooding in Pakistan, China and Canada, while northwestern Europe has also suffered a drought. This has taken the wheat world by surprise. Wheat is a hardy grain resistant to all but the worst weather and producers grow it in overabundance. Huge wheat stocks have traditionally backstopped shortfalls in other soft commodities. As such, wheat is also the speculator's favorite grain to "short" since price declines are expected in all but the worst years. However, this year the tables were turned on everyone setting off a short-covering panic and buying frenzy in wheat futures which have gained over 35 percent in a short time.
There is a domino effect when a commodity as important as wheat has a sudden and sharp decline in supply. Livestock producers, for example, who may have been feeding their herds on cheap wheat are shifting out of that high-priced grain to corn. Suddenly the price of corn begins to rise. Rice, often a substitute for wheat in human consumption, has also risen recently.
In the commodity trading pits, sentiment has rapidly changed because of these windfall profits. Speculators, looking to make a fast buck on the next commodity to move are buying up anything that goes snap, crackle or pop. Normally this kind of behavior only impacts prices in the short-term (similar to the price effect of an unexpected freeze in Florida's orange juice production).
This time, however, because of wheat's function as the grain of last resort, this impact on prices could stretch out into the first quarter of next year. Investors have bid up the stocks of fertilizer, farm equipment and other agricultural-related companies as farmers around the world plan to increase their own production in an effort to fill the "wheat gap." Out in our own Midwest, farmers are optimistic that prices will be rising throughout the rest of this year and into next. But don't start stocking up on Cheerios quite yet.
The U.S. Department of Agriculture is only expecting a 1.5 percent increase in prices this year, which is actually down from the prior two years, when prices grew 1.8 percent per year. The real increases in food prices are still waiting in the wings until the world's economies are on firmer footing. Once people can afford to spend again, prices are expected to move up quickly in commodities across the board.
@theMarket: Stocks Regain Their Footing and Then Some
This wasn't supposed to happen. The week before Labor Day is notoriously slow with few, if any gains or losses for the week, but somebody forgot to tell that to the markets. It would appear from the upside action that we are once again going to run the S&P 500 Index back to the top of the range at 1,130. Whether we break that upside resistance remains to be seen.
I telegraphed readers that we could have a bounce this week but even I was not expecting this much upside.. The rally kicked off on Wednesday, the first day of September, and in just three days the indexes have gained more than 5 percent. Ostensibly, the trigger for this melt-up was some manufacturing data out of China and a positive economic report from Australia that indicated the world's economies were still growing. If you believe that, I have a bridge I want to sell you in Brooklyn.
Although it's tough to prove, I believe the real story behind the market's move is that this week's unemployment numbers were leaked to The Street earlier in the week. This would not be the first time (or the last) that government sources have dropped insider information on their pals within the financial sector. I guess when the government breaks the law its OK.
August's job report indicated that the private sector added more jobs than anyone expected last month, while the Labor Department revised its previously announced data showing even bigger private sector gains in employment were made in both June and July. That's good news for a market that is overly focused on weekly, if not daily, economic and unemployment numbers.
I've recently noticed that everyone has a pet idea on how to reduce the unemployment rate. Everything from tax credits to tightening immigration to make work programs FDR-style have been floated, discussed, critiqued and floated again. So I guess I'll throw in my two cents, given it's the Labor Day weekend. My idea, however, wouldn't cost the taxpayer an extra penny.
Let's say you've been out of work for a year. You are on unemployment but bored to tears, feel like a failure and have just about given up sending out resumes. Why not offer the next prospective employer a deal. You'll work for free over the next six months; that's right, for free, but after six months, if you are doing a good job, the employer pays you for the last three month's work and hires you.
Once agreed, it's all up to you. You've got six months to show your stuff - how hard-working, smart and dedicated you are. The worst that can happen is that you are let go, but in the meantime, you might learn a new skill, tool or trade and possibly unearth other job opportunities.
The employer, meanwhile, receives an added boost to productivity in the form of free labor (minus the start-up costs of training you). That could generate more business for the company in the form of sales and profits, which could help grow the economy. I tried out my idea on several small business owners in the Berkshires.
"I would go for that hands down," said the head of a local engineering company.
"Count me in," agreed the boss of a construction crew, "and if the person showed any sort of initiative, I'd probably pay him for the six months."
Every one of them said it was an idea they would support.
Of course, I recognize the issues involved. On unemployment, you are supposed to be looking for work, not working for free. There would be questions about insurance, possible legal hassles, etc. But possibly the biggest obstacle to overcome is the American attitude that we deserve a job, as opposed to working for one. It is not our God-given right to be employed.
There was a time when I desperately needed a job. Straight out of Vietnam and the Marine Corps, I was paying my way through college in Philadelphia while working on a journalism degree. Borrowing a suit coat and tie, I wrangled an appointment with the editor of the city's largest newspaper.
"If I don't get a front-page story in the next three months, I'll walk," I offered.
The hard-bitten boss of the city desk agreed and subsequently put me in a department that had never published a front-page story in the 100-year history of the paper. Three months later my front-page story sold out the evening edition. I got the job and a journalism award for the best human interest story of the year. It can be done. Try it.
The Independent Investor: Does Cash Mean Currencies?
There was a time when one of the rules of asset allocation was to always keep a little cash in your portfolio. Cash was the safest bet you could make. It became the place where we retreated when the markets were in free fall. Today, however, cash as an asset class, earns almost nothing. As a result, many individual investors are using that cash to trade currencies and in the process transform the world’s safest investment into something a lot more speculative.
The headline on the front page of Wednesday's Wall Street Journal read "Currency Trading Soars." The article explained that buying and selling currencies has become a $4 trillion a day market. How much of that volume is attributable to individual investors is hard to measure but from my own experience I can tell you that investing in currencies has never been easier or cheaper. Thanks to exchange traded funds (ETFs), the average Joe has his pick of 44 currency funds that are as easy to buy and sell as individual stocks.
Here in America, where since World War II we have been accustomed to having one of the world's strongest currencies, the desire to invest in other country's currencies has not been high on the list of investment priorities. The currency markets were something that banks used to square up their overseas borrowing or to provide you the necessary currency for your vacation to Hong Kong or Spain. It has only been in the last few years that Americans have begun paying attention to the dollar and its overseas purchasing power.
In other countries, where the fluctuations in the value of their currency can mean the difference between a secure future and poverty, trading in and out of currencies has been a way of life and a traditional avenue of investment. With the introduction of internet trading, ETFs and around-the-clock trading, retail investors in places like Japan, China and throughout the Middle East make a career of day trading currencies.
Clearly currencies markets offer the investor more depth. The currency market, at $4 trillion per day, dwarfs the trading in stocks which is only $130-$140 billion per month. The bond market is much larger and averages $456 billion/day but is still less than half the size of the currency markets.
"The stock markets are totally manipulated by a handful of big players. Bonds provide me less than the rate of inflation. Currencies, on the other hand, can make me a lot of money if I’m on the right side of a trade," argues one retired, ex-Fortune 500 executive who trades currencies by buying and selling ETFs.
During this summer he shorted the dollar (bought an inverse U.S. dollar ETF) and went long the Yen (bought a Japanese currency ETF).
"I made more money in currencies than I made in stocks since April," he crowed.
Although I congratulated him on his investment prowess, I also warned him that he was swimming with the whales in currency markets. Banks, hedge funds and mutual fund currency departments with trillions to throw around can outgun him money-wise, volume-wise and information-wise. These boys also have 24 hour trading departments. If the Japanese government were to suddenly intervene in their currency market, sending the yen dramatically lower (and the dollar higher), my friend could easily wake up tomorrow morning to a sizable loss before he could do anything about it.
This summer's collapse in the Euro was largely triggered by hedge funds. Riding the hedgies coattails works but only until it doesn't. The retail investor was the last to know when those big dogs reversed that trade. My advice to the majority of investors is to keep your cash in a money market and not try to speculate with it in the currency markets.
A better bet would be to buy a country fund or ETF if you believed the prospects of the country were better than most. That way, if you are right, you get a double win both on the country's currency and on its stock market.
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