Gold’s Bull Market Turns 9 Years Old

March 18, 2010 by · Leave a Comment 

By Mary Anne & Pamela Aden

Gold, silver and the metals group are coming down from their January highs, on the eve of gold’s nine year bull market run. Considering the gold price has had nine consistent yearly gains, and it’s still above $1000 is a feat in itself. Gold’s bull market is solid, a new phase has begun and it’s currently declining in a sharp, yet normal downward correction.

Corrections tend to cause fear. And considering the volatility we’ve seen in recent years, the fear level rises fast. The word bubble is the buzz word, and it’s understandable since we’ve had so many over the last decade. The tech bubble was followed by the housing bubble, the credit bubble, and the debt bubble that continues to grow.

The debt bubble is an ongoing reality; it’s international in scope and it’s the biggest ever. This is hanging over our heads and over the markets, and it isn’t going away, it’s just getting bigger.

GOLD RISES WITH UNCERTAINTY

Debt monsters of the past have tended to end in deflationary depressions, but it’s important to understand that gold can rise in this kind of environment. Remember, gold rises during economic uncertainty. In the early 1930s, for example, during the Great Depression, President Roosevelt raised the price of gold almost 70% from $20.65 to $35 an ounce in a struggle to bring back inflation.

Gold is money. It’s the currency of last resort when monetary times are difficult. So when gold rises in all currencies, as it’s been doing for several years, you know the rise is enduring and superior (see Chart 1). So even though gold has no yield or earnings to measure like the other markets do, it has true value.

The central banks are flooding the markets with their own currencies, and competitive devaluations will continue to grow. Many countries depend on exports for economic survival. This means the best price in the current deflationary environment wins, which is what a cheaper currency does.

This situation originally started with globalization and it’s bullish for gold. The U.S. is still in a delicate situation. It needs a weaker dollar to compete and stimulus measures must continue, which are both ultimately bullish for gold.

This is one important reason why we do not think gold or commodities are in a bubble. We believe they are rising within a mega trend that could last several more years, perhaps a decade. Some say that China is in a bubble and if they are, the demand for commodities will fall. China may be overheated but we don’t think it’s in a bubble. Their growth, even if it’s only a part of what they claim, is solid.

Commodities are in demand and this continues growing with each passing month. China is the engine for demand. It’s the biggest consumer of many raw materials, like aluminum, copper and iron ore. In fact, just last month the number of iron ore and coal ships hired to carry cargo to China jumped 38%.

Rio Tinto, the second largest resource company in the world, forecasts that China’s consumption will be more than double by 2020. That’s only 10 years away.

China and other countries are also buying gold. It currently only makes up about 2% of the reserves in emerging markets. With the average being 10%, there is interest and a need to continue adding gold to their reserves.

Aside from central banks, mutual funds are adding gold to their portfolios as well. This month, the second biggest U.S. public pension, the California State Teachers retirement system, is considering investments in commodities in order to boost returns and provide a hedge against inflation.

Yes, gold is slowly making its way into mainstream investing, in large part thanks to the Exchange Traded Funds, ETFs. They have made it easy to invest in gold and commodities.

BAD NEWS COINCIDES WITH DECLINING MARKET

Debt and how it’s handled will be the driving force in the markets looking out to the years ahead. And interest on the debt, compounded, will be the biggest problem.

This is why there are so many doubts that the economic recovery will be sustained. The commodities, metals and energy fell sharply in recent weeks on concern that rising job losses in the U.S., and mounting debt in Europe, will slow economic growth and, therefore, curb demand.

Interestingly, this type of news becomes more common when the markets are due for a downward correction anyway. The great rises in the metals and crude oil were overextended and they’ve been poised for a downward correction.

With copper being the global economic barometer, the fact that it fell sharply for the first time since the rise began a year ago, provided a good example of bad news hitting an overextended market. A bull market decline is now underway.

Gold is a good example too. Its seven month rise that peaked in November, which we call the C rise, was a bullish one that had reached maturity. By gaining 40% and meeting our original target level, we knew the bulk of the rise was over, for the time being.

GOLD: “D” decline underway

A D decline is now underway. These declines tend to be the sharpest intermediate declines in a bull market, and so far this one is following the pattern. Chart 2 shows that gold’s leading indicator (B) declined clearly below its uptrend and it could now fall to the low area while the gold price itself stays under downward pressure.

The $1000 level is a key support area, which is near the prior C peak in 2008. The 65 week moving average, now at $975 is rising and it’s set to reach the $1000 level in a few months, which will further reinforce the support at $1000. For now, $975 to $1000 is the strong support level for gold.

Interestingly, gold at $975 would be a 20% decline from the November $1218 peak. The worst D decline so far in the current bull market was in 2008 during the financial meltdown. Gold fell almost 30% from March to November. This was an extreme case in an extreme situation. A decline to the $950 level would be similar to the 2006 D decline, which was the second worst decline since 2001.

In other words, the extent of the decline is about half over. As for timing… since 2004, the D declines have been lasting about twice as long compared to the first years of the bull. This means we could see the decline end any time from here on out, if it’s on the shorter end, but more likely it could last until April.

Pressure is likely to stay on gold and the metals in the weeks ahead, which means it’s time to take advantage of weakness by adding or buying new positions. Gold’s major trend remains up, indicating it’s headed higher. But for now, it will temporarily remain under downward pressure by staying below $1110.

12-12

At What Cost?

February 28, 2010 by · Leave a Comment 

By Steve Betts, www.thestockmarketbarometer.com

Whenever you embark on a significant activity, and it doesn’t matter whether its business or personal, you have to ask yourself two important questions: why and at what cost. In 1913 the United States adopted a central bank system and an income tax, both of which were and remain unconstitutional. At the time the United States was the richest creditor nation in the world and already had the best central banker in the world, gold! The US settled all transactions in gold and in order to spend more, it would need to have more gold. Gold could not be printed or created in some computer hard drive; it had to be dug out of the ground at great personal and financial sacrifice. Even more than this, gold represented real wealth and that’s why a 1913 dollar bought the same thing as an 1841 dollar, and that’s what a store of wealth is supposed to do. This begs the question why you change something that seemed to work almost to perfection. For the answer to that question, you need to go back a little further, to 1907 to be exact.

In 1907 the markets suffered the worst financial crisis in their history, but this crisis devastated Wall Street while leaving Main Street mostly intact. A lot of big name brokers and bankers went down the tubes as a result of the 1907 panic and that inspired the survivors to get together and create a plan that would prevent another such crisis. The group included Morgan, Vanderbilt, DuPont, and Rothschild, and they all ended up as shareholders in the new and private Federal Reserve System. The problem with gold during a crisis is that you can´t increase the supply overnight, so “bailouts” are not possible. Too big to fail banks and brokerages must therefore fail, and that was an unacceptable and intolerable situation for Wall Street. So they created the Federal Reserve and paper money “to facilitate business and the economy”, which would be backed by gold. In an emergency, you could always print paper and then drain liquidity once the crisis had passed. Additionally, they created the IRS with the mission to tax personal income, so the government would have funds to handle any emergency.

Now we get down to the meat of the issue, at what cost? Everything we do in life has a cost, but usually it’s so miniscule that it is seldom noticed. Going back before 1913 the United States had experienced an industrial revolution that led to the development of a strong middle class in America, and that middle class had as a group, accumulated wealth. That wealth served to make the US the richest creditor nation in the world, and it was decided that wealth would be better served if it were transferred to Wall Street for “safekeeping”. After all, they were in the money business. The private Federal Reserve was created with no assets, allowed to print money backed by gold the middle class had earned, and then charged interest and fees to distribute that money. In 1932 Roosevelt confiscated all the gold held by Americans and in 1973 Nixon eliminated the gold standard altogether. Any attempts to interfere with Fed business was dealt with harshly. 

So the idea was to transfer as much of the wealth as possible from Main Street to Wall Street and it would do so through taxation and the creation of a fiat currency, that would eat away at the purchasing power of the middle class. And that is the true cost of the Federal Reserve. The average American has gone from a saver to a debtor, while the US went from the largest creditor nation to the largest debtor nation ever seen. The transition took a century and is now in the final phases and the massive bailouts that we’ve seen are nothing more than an attempt to drain the last cent from the last American before the whole thing goes under. For more than ten years the Federal Reserve has done everything possible to change the primary trend of the markets from bearish to bullish. Although I note the bull market as having topped in October 2007, the real top was back in 1999, but the Greenspan Fed delayed that with massive amounts of liquidity. Now the Bernanke Fed is trying to do the same thing. In modern history no one has every succeeded in changing the primary trend of a major market.

The result of this misguided policy is to postpone the inevitable, but at a cost. The cost is a series of unintended consequences that only now are beginning to float to the surface. Like icebergs, we see only a small portion of the problem until it’s too late. I contend that it is now too late. The ship of the economy is now run up against the iceberg, huge holes are being gashed into the hull, water is pouring in, and all the passengers are passed out in the bar. Any effort to put more punch into the bowl will prove to be futile and the resulting hangover will be debilitating to say the least. The morning after survivors will swear that famous oath of “never again”, form committees, assign blame, and then start the whole process all over again. For the few that will have any money left, and the courage required, stocks will become cheap and there will be a great buying opportunity. For the large majority there will only be misery.

Of course governments are obliged to throw the public a bone every once in a while, no meat, just a bone. Obama ran on the promise of change and then came in and bailed out Wall Street at the cost of US $2 trillion. He distracted the public’s attention with his proposed health care package that in the end no one wanted. Now he has a new mantra, job creation. He recently put forward the idea of a US $40 billion fund for job promotion and now he recommended the commencement of several nuclear plants that will mean more jobs. Unfortunately the President failed to say that most of the jobs for nuclear plants are high paying technical positions and there aren’t that many required. If you really want to create jobs it’s the small business owner that does it, and he has his back against the wall and it gets worse every month, as you can see in the chart posted above. The number of businesses with cash flow problems is on the rise, meaning they’ll reduce their labor costs instead of hiring new workers.

The question now is what can you do about it? I believe the only solution comes in the form of one ounce coins that contain gold. All markets are barometers of future activity and no market is more sensitive to the qualms and traumas of everyday life than gold. Also, I think it’s fair to say that it has never been this difficult to understand the gold market. The IMF comes out and announces the sale of 191 tons of gold, in an effort to manipulate the price lower, and gold falls, for about an hour. Then the Fed authors a surprise rate hike and gold falls for a couple of hours. One gold guru says the yellow metal is going to US $5,000 while Elliot Wave says it’s going to US $400.00. In one minute gold is up 15.00 and an hour later gold is down 20.00. What do you do and who do you believe? Years ago I took a simple, albeit difficult path, and decided that I would only follow the primary trend. The primary trend in gold turned up in 2001 and has been heading higher ever since. I took my initial position in 2002 and I’ve done my best to add on after significant dips. Sometimes I’ve timed it right and sometimes I haven’t, but the one thing I’ve never done is sell!

Below I’ve posted a monthly chart with respect to the gold bull market and I have some interesting observations. You can see that the current price is right about in the middle of the two ascending bands that define the primary trend. Also, I’ve divided the current bull market into the first and second phases, and I’ve given you a short explanation for each of the first two phases. The question now is whether or not gold has entered a new third phase with the breakout above 1,000.00 and we really won’t know until gold makes the next move. Incidentally, the third phase is highlighted by buying from the general public and there are certainly no signs of that. On the monthly chart gold’s price actually appears to be consolidating for the next move higher. It will continue to consolidate as long as it holds above support at 1,048.90. On the other hand it will require a close above 1,136.70 to bring gold to an upside breakout, and that hasn’t happened yet. On Friday the spot gold closed out the week at 1,117.00 and that’s about a sixteen dollar gain for the five sessions, although it felt like a loss due to the volatility.
So the primary trend for gold is up, it is completely intact and in no danger of being violated, and it appears that we could be close to a break out to the upside. So why is everybody so negative? Part of it has to do with ignorance. The large majority of people view gold as a commodity when in fact it is a store of wealth. These same people view fiat currency as money when in fact it is debt; a “promise to pay” can only be interpreted as debt. Gold on the other hand is the only real money and it says so in the US Constitution. It seems that our founding fathers were a lot smarter than we are!

Over the short run the panorama appears to be improving. Gold recently staged a minor breakout above the upper band of a descending trend line in an effort to move higher. That is a minor victory. The real victory will come when gold closes above the 50% retracement from the December high to the February low and that resistance comes in at 1,136.70.  Until we see a close above that mark, it’s all just a guessing game. Gold had a volatile week with announcements by the IMF and Fed designed to push the price lower and yet it finished higher. The dollar rallied as well and yet gold finished higher, so it would appear that the yellow metal is gaining strength. I have maintained for weeks that the dollar, commodities, and gold are all linked to the Dow over the short run, and I still believe that. Therefore, I won’t get overly excited until I see how gold reacts when the Dow begins to fall in earnest.

In conclusion the dollar, stocks and bonds must head lower over time. The dollar and the bond are debt, while stocks represent value in some company. That value is grossly overvalued as the excess water must be squeezed out. The Fed wants to prevent that and has been doing everything possible for years to stop it. The primary trends in all three are headed down and the Fed wants to change that. If they succeed it will be the first time anyone has ever done that. I suspect they’ll fail. The cost of that failure will be incalculable in terms of both money and social harmony. The standard of living for the average American will drop substantially. Repercussions will follow. The only way to protect yourselves is to buy gold, and physical is preferable to paper. Store it someplace safe and just wait for the storm to pass. I know you are tired of hearing this, and God knows I am tired of saying it, but you’ll come face to face with this reality before the year ends.

Steve Betts
Stock Market Barometer SA
February 21, 2010

12-9

Gold in the Limelight

November 25, 2009 by · Leave a Comment 

www.adenforecast.com

Gold is soaring, hitting new record highs almost daily. This C rise is going strong. Our initial $1200 target level for this year’s rise has nearly been reached, but gold could go higher.

This is good news for all of us who have been invested in gold for the past eight years. But even for those of you who invested in more recent times, gold has been a good and profitable investment.

We feel strongly that this will continue in the months and years ahead. And there are many valid reasons why.

Most important, the unprecedented monetary policy currently in force is inflationary. The same is true of the weak U.S. dollar, negative interest rates, rising oil and commodities. Gold buying by central banks is also boosting the gold price higher.

Even though gold is still relatively unknown in mainstream investment circles, it’s starting to attract some attention. As this interest grows, momentum buying will pick up and the exchange traded funds are another big positive, simply because they make it easy to buy gold. The improving economy is another positive factor.

Yes, there are problems…. serious problems.  But that doesn’t mean the world is going to fall apart next month or next year.

Pessimists are always going to paint the worst case scenario. Optimists will forever present the best case scenario. The reality is usually somewhere in between. But the markets and the facts always tell the story and that’s what we try to focus on. So what are they currently telling us?

First, despite all that’s happening, it’s important to put things into perspective… and looking back, the overall situation was a lot worse last year compared to how it is now.

Remember, the entire financial world was on the verge of collapse last year as one huge company after another failed, or came close to it. Economies worldwide were dropping and so were all of the global stock markets. Fear and panic were rampant, and with reason. The crisis wiped out a greater chunk of household wealth than during the Great Depression. No one knew what to do…

Now fast forward to today…

For starters, nearly every economy in the world is growing, some obviously more than others. But the point is, they’re all up. Stocks around the globe have also been rising this year and confidence is returning.

In the U.S., for instance, the economy grew 3½% in the third quarter. The leading economic indicator has been up for seven consecutive months and stocks, which lead the economy, have been rising for eight months. Manufacturing is on the mend, along with other important economic signs, all showing that the recession ended in June and the economy is now on its way up, albeit slowly.

In other countries, growth has been far more robust. In China, for example, the economy is growing at a 9% rate. So Korea is growing at the fastest pace in seven years. India is going strong, the same is true in most of Asia, Brazil, and to a lesser extent, Europe is improving too.

2009: Great gains

So far, based on 18 of the world’s major stock markets, the gains this year have ranged between 11% and 92%. The average has been 31%. So even though the Dow Industrials is only up about 14%, the global stock markets are all telling us that ongoing growth lies ahead.

Since the markets look to the future, if that were not the case, these markets would be falling, not rising.

Okay, but what about commodities? The CRB commodity index has gained 24% this year. More impressive, copper has soared 101% and it’s known as the global economic market barometer.

Oil has also surged. It’s gained 75%. Very simply, if these two key commodities were not in big demand due to improving world economies, they wouldn’t be rising the way they are. Instead, they too would be falling.

The main point is… these are not signs of recession and they’re certainly not signaling a depression. In fact, they’re telling us that deflation is not currently a concern.

On the contrary, these rising prices are more indicative of inflation downstream. That’s especially true considering the weak dollar.

Again and very simply, in a healthy economy annual deficits shouldn’t be more than 3% of GDP. Once this percentage exceeds 5-6%, the currency of the country involved historically falls sharply.

Currently, this percentage has soared to about 10% in the U.S. and unfortunately, that pretty much puts the nails in the dollar’s coffin. This alone will propel gold much higher.

These are the key reasons why we continue to recommend buying and holding gold. Whatever the ultimate, longer-term outcome, it’s pretty clear that the situation is going to intensify and as it does, gold is going to be the main beneficiary and its bull market will endure well into the years ahead. That’s been the case for thousands of years during times of economic uncertainty and gross imbalances, and it’s now happening again.

Note that gold rose 56% and 58%, respectively, in the last two C rises (see Chart).  So far, gold has risen 32% in the current C rise.  Plus, its leading indicator still has room to rise further before it reaches the temporarily “too high” area.  Since this rise is powerful, the gains this time around could be similar to those in 2006 and 2008.  And if they are, gold could continue up to near the $1350 level before this C rise is over.

We’ll be watching closely but for now, hold on to all of your metals related investments.  Silver and gold shares are also surging, and so are most of the other metals.  Silver is at a new 16 month high and it too is approaching our first target area.  Gold and silver will both remain super strong above $1070 and $17.20. 

11-49

Time to Sell?

April 27, 2006 by · Leave a Comment 

Time to Sell?
So there you are, one of the lucky few who, a couple years ago, spotted the best places to invest and now see some fat gains in your portfolio holdings. Is it so great that you consider scattering your account statements on the floor and rolling around on them? Or is that just me? But then, it might also occur to you that those big gains could be temporary, while selling the big winners could lock in your well deserved gains. So, do you sell? Or do you ride the wave a while longer, hoping to increase your gains?
My first reaction to the question about ‘’taking profits’’ on big gains in emerging markets stocks or funds, or perhaps gold and energy funds, is always the same. ‘’Gee, I don’t know if that’s the smart thing to do.î Comforting, right? But let’s be realistic for a moment, even rational, as all investors think they are.
If I knew for sure when to sell raging winners or strong performers in the Indian or Brazilian markets, that would infer powers of prescience that only CNBC promoters claim to possess, though they know no more than you or I. Such a call would suggest skill at predicting the future, or at least those actions forthcoming from thousands (if not millions) of other investors with different methods and goals.
Let’s be realistic about investing! I’m guessing where to invest now. I always have — and always will. What are the best things to buy now? And the best things to sell? If anyone really knew with any certainty, then investing would be so easy, everyone would know investors who ìcrushî the market regularly. But those ìcrushersî don’t exist, do they? So no one knows for sure what to do. We’re all just making our best guesses.
After accepting that premise, we can consider our choices — with the proper amount of humility to gain favor in the eyes of the market gods, who never stay long with investors claiming great success in the markets. And just as important as humility is accepting, from the start, that making major portfolio changes may cause regret in the future.
You could sell your big winners now — only to watch them rise even higher. So will you be right or wrong? The wrong decision plus a potential ego dent can linger in your memory and affect future decision making, adding an emotional influence that makes investors even less rational. But a decision must be made, and standing pat is also a decision.
So letís look at some decision-making ideas. First, we must admit that the changes we consider are timing decisions. Yet we all know we can’t time the markets, right? Timing is another one of those widely accepted ìdead wrongî investing tenets with the same value as diversification or the concept of ‘’stocks for the long run.’’
But you can consider timing in making your decision, since you always have in the past. And so have I — and most everyone else! You donít believe me? An illustration might help. Perhaps a friend asks you what to do with new money going into his brokerage account. What should he buy? Maybe some shares of the S&P 500 index fund or a good international equity fund? Or some energy stocks balanced by a mellow bond fund?
So when would you tell your friend to buy? In a month? Next March? Or maybe you suggest buying right now, since other things, like technology or gold funds may have already run too far, too fast? Yes, any investing decision involves timing, as in what you buy from all available options.
Yes, gold stocks and funds have had a great run for the past five years! In that time, for example, Fidelityís Select Gold fund has powered about 200% higher than the S&P 500, which sits about where it started then, showing a minimal gain in nominal terms. So this point brings up two more problems. Do you avoid the big winner, the gold sector, since it has done so well and is selling at a high price? And will you re-balance your portfolio, as in selling some gold shares and adding the cash to your S&P fund?
Consider this as you decide whether to sell a high flyer like gold. In 1998, the Russian government was essentially broke and defaulted on bonds issued to foreign investors. The situation looked bleak as the stock market index sat at about 100. Only a fool or high risk taker would have ventured into something looking that bad — or so it seemed.
A couple years later, smart money saw value there and watched that index power higher, going past 300, 400 and then 500. A great time to sell and take profits, right? Surely, you wouldn’t buy into a market that had risen 300% or 400%, right? And just where is that market index now? In late April 2006, the Russian market sits just above the 1,600 level.
For another fine example, look at the Brazilian market. Pounded down in unison with the S&P 500 during the bear market of 2000-2002, it bottomed at about 8,400. But smart money saw value there and watched as that index rose about 20,000 in a little more than a year. Is it time to sell? Maybe not, even with that index hitting a new, all-time high this week, passing the 40,000 level.
Did you hear on CNBC last year that you should sell your energy stocks or funds since oil had more than doubled in price and would soon fall? With oil now costing above $75 a barrel, how smart was that? One thing I have learned the hard way is that trends tend to last longer than you think they will. Selling your best performers seems like a great idea — until you realize that the person buying your winners may hold them and make even more on them.
And re-balancing is a stupid idea for several reasons. The worst of them are that all asset classes will, at some point, have their day in the sun and that selling your winners at a high price and buying more of your losers at low prices will ensure success over the long term. For a useful illustration on how that could fail to work, consider the investor in Japan who diversified into the S&P 500 in the early 1990s.
As his home market tanked, with the Nikkei average falling from 39,000 to about 8,000 in 13 years, he would have re-balanced annually, selling some of his winning S&P shares and moving the cash into a market that continued to fall every year! Each year he added to his losers and reduced the impact of holdings in a winning category.
So how about a couple ideas that seem better to me? If you have big winners in your portfolio that are making you nervous, consider selling a portion of them over time. If the fear of losing your big gains outweighs the fear of selling too soon, go ahead and sell. But my compromise solution allows hedging your decision somewhat and reducing the chance of being glaringly wrong. You are only a little wrong, regardless of what happens.
Another idea is doing a fresh fundamental analysis on why your best performers are doing so well and whether they will continue. Recently, I overheard a conversation at a local office of a big mutual fund company catering to individual investors. The investor asked the nice lady about her interest in buying into the companyís Latin American sector fund, a recent big winner. The lady commented that recent performance was impressive, indeed, but wondered how long those big returns could continue. If you, like this lady, have no idea about your holdingsí recent performance, you need to do some fundamental research, rather than just walking away from what seems too good to be true.
Brazilian stocks, a major portion of any high-flying Latin America fund, still look as good as ever! In fact, they look better now than three years ago when that market began its current bull market. And the market is still quoted as selling at about 13 times earnings, on average, while the country enjoys a trade surplus and its government, a small budget surplus.
Adding to these factors is a recent development regarding energy. Brazilís domestic oil production now sufficiently satisfies domestic demand, lessened by a long-running project to produce substantial amounts of sugar-based ethanol. Sharply rising energy prices have little effect on the economy. And while concerns are warranted, based on past events, that the currency could lose value sharply, Brazil sits on billions of dollars, enough to intervene on behalf of the real.
Similar conditions now exist in Russia, though they did not when that market began its huge bull trend. Awash in foreign currency reserves, the country, as a major world supplier of ever more costly energy, now runs budget surpluses. When Russiaís bull market ensued, oil sales were barely profitable. Fundamentals have clearly improved, right along with rising stock prices, which are much higher now. And valuations have risen right along with them.
The best of all fundamentals may be found in gold. When gold began its huge move higher, our federal government was running deficits so small that co-mingling excess Social Security withholdings as part of general operating funds (during Clinton’s second term), appeared to be a small federal budget surplus. Since then, the Bush regime has splashed red ink everywhere, and America’s unfunded liabilities for retirement programs like Social Security and Medicare have shot higher, from about $20 trillion in 2000 to over $50 trillion, with some estimates even higher.
And since Americans are not saving, all government funds must be borrowed. Of course, all the money left in the world wonít buy that many bonds, since countries with money to spend, like China, Russia, etc., have domestic investment needs. Our leaders will, no doubt, print whatever money is needed, and that amount grows shockingly higher — much higher than anyone thought possible when the Bush team took charge five years ago. So rising inflation makes our bonds really bad deals and makes borrowing even harder. The dollar printing press will run for the foreseeable future, so the fundamental case for gold improves along with its valuation.
With energy, today’s supply-and-demand problem was not as evident in investor thinking four or five years ago. The Iraq war has decreased oil production there, something not factored into the thinking of pre-war energy investors. And didn’t we all assume that oil production would increase after the invasion?
And as the Bush administration continues to anger eight other oil suppliers, such as Iran, Saudi Arabia, Venezuela and Russia, the potential use of energy as an economic weapon is higher now than when Bush, early in his first term, looked into Vladimir’s eyes and felt his honest soul. So again, fundamentals rise along with prices.
The best reason to sell or, better, scale out of your biggest winners is when the holdings just become too large in your overall portfolio. If you intended to maintain a 10% allocation in gold shares or funds, (which one really doesn’t matter, since they’ll rise together) and your gold holdings have risen to 15% or 20% of your portfolio, reduce your exposure. The added volatility resulting from such a large asset class position only increases the chance of your making an irrational decision later.
Of course, keeping your shares in a rising market like gold increases your chance of winning big, too, so factor that in as well. And when you sell some of your big winners, you must find something else with solid fundamentals to buy. And how many opportunities like that are available now?
So don’t sell just because something has done well. And don’t re-balance annually either, by taking money from sectors or asset classes in the middle of wonderfully profitable secular bull markets and adding hard-earned gains into something like the S&P 500, clearly in the early stages of a secular bear market.
Have a great week.
Bob