agricultural commodities, alternate energy, Austrian school, Bailout News, banking crisis, banks, bear market, Bollinger Bands, bull market, capitalism, central banks, China, Comex, commodities, communism, Copper, Currencies, currency, deflation, Dennis Gartman, depression, diamonds, dollar denominated, dollar denominated investments, economic, economic trends, economy, Federal Deficit, financial, Forex, futures, futures markets, gold, gold miners, hard assets, heating oil, India, inflation, investments, Keith Fitz-Gerald, Marc Faber, Mark Hulbert, market crash, Markets, mining companies, Moving Averages, natural gas, oil, palladium, Peter Brimelow, Peter Schiff, physical gold, platinum, platinum miners, precious metals, price, price manipulation, prices, producers, production, protection, rare earth metals, recession, risk, run on banks, safety, Saudi Arabia, Sean Rakhimov, silver, silver miners, socialism, sovereign, spot, spot price, stagflation, Technical Analysis, timber, U.S. Dollar, volatility, warrants, Water
Can you sense it? There seems to be an eerie calm in all of the markets. Could this be the calm before the coming financial storm round 2? Since Gold is considered a safe haven investment in times of financial uncertainty, it would seem to tell us something is about to break wide open. As I enter this post Gold is up $5 oz to $912.50. We saw some retracement yesterday but support levels at $900 oz held. It appears that prices are taking a breather. This comes after an approximate $95 dollar an oz rise in just the past 14 days! As I mentioned in my post from a few days ago It’s Official Gold is in a new Bull Market.
Quick sample of some recent headlines:
The Associated Press writes, “Gold Prices Soar as Investors Flee Wall Street.”
The Bullion Vault claims, “Gold Prices Poised to Move Higher.”
Forbes observes, “Gold Prices Resume Long-Term Uptrend
So What’s next? Read on…-Good Investing! -jschulmansr
Dugan termed his apprehensions of gold striking such a high as a “fear” that may come true. He reasoned that such a price would mean the other commodities and streams of investments have been shunned by investors.
With confidence in currencies shaken to the core, the yellow metal is increasingly assuming the role of “the most trusted currency”, Dugan said. “We have never seen such a rush to buy gold. It’s bringing in security and it’s still affordable.”
Merrill Lynch commodity price forecast authored by Dugan showed that gold prices can rise from the currently prevailing $913/oz to $1,100/oz in the first quarter of 2009 and to $1,150/oz in the second quarter. “While demand for gold has been rising production has been declining. South Africa, which accounts for the major share of global gold production, is facing political issues and has energy problems,” Dugan said.
With reports of declining returns from other investment options, “cash” – keeping money safe in banks and investing in government bonds – is the option in front of investors, Dugan said.
“Fear” and eventual decline of the greenback are the two factors that will drive gold prices, he said. While commodity markets could also bounce back in the first half of the year, a rebound is likely to be short-lived in the absence of strong US consumer demand.
Precious metals, led by gold, could enjoy a more sustained rally with gold benefiting from a weakening of the dollar in the second half of the year, Dugan said.
Dugan said the greenback, which has been strengthening for the past few months, will decline in value by the middle of this year. “That’s when people will begin to realise that President Obama’s policies are not having the desired impact,” he said.
Investors could also look to private equity, which produced strong returns during the downturns in 1991 and 2001, on an opportunistic basis. Some hedge fund strategies may be worth following but hedge funds should be treated with caution, Dugan said.
Returns from private equity should remain in single digits in 2009 and a return of beyond 10 per cent should be treated as “fair value”, he said. “Investors should remain cautious. They need to be prepared to take profits. We think any such rally would run out of steam by the second half of the year.”
Low risk assets could offer private investors the best prospects of attractive returns in 2009 as the world’s leading industrialised nations face recession, Dugan said. With governments around the world striving to tackle the economic crisis, private investors could find value in a cautious approach towards asset allocation. Options include high-grade corporate bonds and high-quality, high-yielding equities in defensive industries.
“Investors will look to long-term US government bonds as an important barometer of the progress of global recovery,” said Dugan. “Sharply rising bond yields will show that the governments have overspent.”
While earnings downgrades are likely to dominate the first quarter of 2009, a rally in global equity markets could be on the cards for the first half of the year with consumer and cyclical stocks among the potential beneficiaries, Dugan said.
Broad equities indices could also offer trading opportunities to private investors. “Equities could outperform as an asset class in 2009 unless there is a serious deflation risk. Our view is that deflation will be avoided,” he added.
Selective investment in high-grade corporate bonds could also provide attractive returns, Dugan said.
Inflationary actions by the Fed and a declining TED Spread have proven effective in fighting falling asset prices and reducing risk
- Treasury bonds need to have higher yields or money will go into equities
- Equities have “overshot” to the downside, thus resulting in excessively low valuations
I agree with Saxena’s basic premise that the Fed’s actions will be successful in creating inflation in the aggregate; it is only a matter of which asset class will reap the benefits of that inflation, and who will pay for it. The chart below compares various asset classes against one another for the month of January.
click to enlarge
A key question we may wish to begin asking and examining is just how much inflation the Fed has really created for us, something that will become more apparent as lending resumes and money that is “on the sidelines” returns to the game. I’m of the viewpoint that the global economy is currently improperly structured, and needs a complete restructuring, one that will likely require abandonment of the US dollar as world reserve currency, a corresponding decline in US consumption, and a significant restructuring of the FIRE (finance, insurance, real estate) economy in the United States.
From that perspective, an equities rally will be unsustainable, unless there is currency debasement to the extent that all markets rise nominally. If that is the case, though, the inflation will result in significant dollar devaluation.
Trading Implications: The fall in Treasuries was the story for January, and will be of importance so long as it continues. If money comes out of Treasuries and into equities and commodities, it increases the likelihood of seeing consumer price inflation. As I’ve stated before, though, I expect commodities to outperform equities once money comes out of Treasuries and dollar devaluation resumes. And as all currencies around the world are having trouble, gold will rise as fiat currencies continue to struggle.
Disclosure: Long gold.
The prospect of the United States defaulting on its debt is not just likely. It’s inevitable, and imminent.
The regulatory black holes into which sanity and reason disappear on a daily basis are soon to collapse under the mass of their sheer size. The circle jerk going on among G7 governments has to end – the steady advance of gold, even in the face of a managed price, exposes the real value of the U.S. dollar, as opposed to its apparent value expressed in the dollar index.
Is 2009 the year that the United States formally defaults? And with that, will the dollar collapse be rolled back ten for one or more?
There are a lot of reasons to support that theory. To Wall Street economists, such an event is heresy and therefore unthinkable. Yet Wall Street is the very La-la-land that bred the idea of a perpetually indebted nation in the first place.
Number one among the indicators favoring this scenario is what is happening in the U.S. Treasuries auction market.
Last Thursday, an $30 billion auction in five-year notes failed to stir the interest of traditional primary dealers. The auction itself was saved by an anonymous “indirect” bid.
Buyers are discouraged by the prospect of what is expected to amount to $2 trillion total issuance for the full year of 2009. The further out the maturities on notes, the more bearish the sentiment towards them. The only way to entice buyers is through the increase in yields.
But with yields at 1.82 per cent, five-year notes were met with a demand for 1.98 times the amount offered – the lowest bid-to-cover ratio since September. A sell-off in treasuries began in earnest upon the conclusion of that auction.
The U.S. Federal Reserve suggested last week that it was going to step up its treasury-buying activity, and the mainstream media interprets this as a form of market support. What it actually is evidence of growing anxiety and desperation on the part of the Fed as the realization dawns that demand for treasuries is progressively evaporating.
The increased demand for gold as an investment witnessed throughout the last two weeks that has pushed gold to a 4 month high is further evidence that investors across the board are gravitating more towards gold and away from U.S. debt.
So what is the catalyzing event that will precipitate outright capitulation?
I think the spin-controlled version of events will make the collapse of the derivatives market the red herring that facilitates the aw-shucks-we-have-no-choice shoe-gazing moment possible, and that’s exactly the parachute the government needs to retain a veneer of credibility – at least in its own delusional mirror.
The announcement that the CFTC was about to become the target of a regulatory overhaul supports this theory. Consistent with his unfortunate proclivity to hiring foxes to guard chickens, Barack Obama’s choice for CFTC commissioner Gary Gensler was the undersecretary of the U.S. Treasury when the Commodity Futures Modernization Act of 2000 was passed, and is one of its architects. This was the piece of legislation that was put forth to appease the opposition to “dark market” trading in certain OTC derivatives first noisily derided by CFTC commissioner Brooksley Born in 1998.
Ignoring Born’s admonishments with this act, it exempted credit default swaps (CDO’s) from regulation, resulting in the somewhere between 58 and 300 trillion dollars in value presently under threat if the positions were to be unwound. Because of their unregulated status, counterparties in the largest transactions can simply “roll forward” contracts, instead of the losing party in the transaction covering their loss with a transfer of money. It is this massive “nominal” value that could be the Achilles heel of what’s left of the U.S. banking system, and by extension, the U.S. dollar.
I don’t arrive at this conclusion because I like making catastrophic outlandish predictions. Its merely the result of following certain logical paths to their most likely outcome based on what has happened in the past.
In discussions on this topic with editors of top tier financial publications, such speculation is dismissed out of hand, and the argument to refute the likelihood of such outcomes is never brought forward.
Gold exchange traded funds (ETFs) are now the largest holders of physical gold, and as a proxy for investors who don’t want to be encumbered with taking delivery of the physical, provide a simple way to participate in the gold market.
United States citizens should bear in mind, however, that should the banking system be brought down completely by the collapse of the futures market, proxies for gold such as ETF’s and bullion funds could theoretically be targeted by a government desperate for possession of value. The risk from security in holding physical bullion is matched by the risk of confiscation by government in these volatile times. Don’t forget, the government confiscated and outlawed private ownership of gold in 1933 in support of an ill-conceived gold standard, which to some extent, was that era’s spin to halt the flight of gold (and real value) from U.S. soil.
Don’t think for a minute such drastic events are outside the realm of possibility. If somebody had told you in 1998 that a bunch of angry crazy pseudo-Muslims were going to fly jetliners into the World Trade Center, what would you have said?
My note: Very Scarey, 10-1 Trade In on Dollars? Gold Confiscated? This is one of the reasons why I use Bullion Vault, check them out for the details…jschulmansr
Good Investing! – Jschulmansr
Nothing in today’s post should be considered as an offer to buy or sell or as a recommendation for any securities or other investments, it is presented for informational purposes only. As a good investor, consult your Investment Advisor, Do Your Due Diligence, Read All Prospectus/s and related information carefully before you make any investments. – jschulmansr