Ivan Lo Equedia Weekly
We had yet another down week in the markets with the S&P, Dow, and the NASDAQ all taking a slight tumble. Which leads me to ask the question, why are people still investing in those markets?
Even with low P/E ratios, stocks remain volatile and the economic outlook doesn't exactly favour stronger earnings. Retail has been soft, manufacturing has been flat, the business investment production index fell substantially, consumer sentiment is down, and the CPI rising. Stagflation anyone?
Unless you're investing for the long term of 5-10 years, a lot of investments today just don't make sense.
Even as analysts predict improvement in the second half, none of them have given us any reason as to why. Even Bernanke, despite saying things will improve, continues to lower his forecast. Because of this, precious metals continues to rise as more fear and uncertainty brews.
The next wave of the precious metals boom is about to come and its going to be big. The strength supporting this rally is about to be injected with yet another round of steroids. Starting first with US politics.
This week, the credit-rating agencies that helped to create the recent financial crisis are now warning that the U.S. could lose the AAA rating it has had since 1917. Both Moody's and S&P threatened to downgrade US debt unless the US raises their debt ceiling once again - allowing the US to spend more and go further into debt.
There's no stopping this spending. In the last three years, the Obama administration has spent more than all of the past 20 administrations combined.
According to WSJ:
"With the recession as a rationale, Democrats consciously blew up the national balance sheet, lifting federal outlays to 25% in 2009, the highest level since 1945. (Even in 1946, with millions still in the military, spending was only 24.8% of GDP. In 1947 it fell to 14.8%.) Though the recession ended in June 2009, spending in 2010 stayed high at nearly 24%, and this year it is heading back toward 25%.
This is the main reason that federal debt held by the public as a share of GDP has climbed from 40.3% in 2008, to 53.5% in 2009, 62.2% in 2010 and an estimated 72% this year, and is expected to keep rising in the future. These are heights not seen since the Korean War, and many analysts think U.S. debt will soon hit 90% or 100% of GDP."
The substantial increases of federal debt held by the public as a share of GDP is just insane.
I am not blaming Obama. This debt ceiling debate happens in every administration. It happened 7 times in the Bush administration and the Republicans who were opposed to it, voted in favour of it during Bush's reign. The simple fact is, spending will happen.
So while the debt-ceiling and debt debates between the democrats and the republicans will more than likely by resolved before the August 2nd deadline, as it always has in the eleventh hour, the downgrade threats may keep coming.
That means the US dollar will lose more value. That means gold will gain.
But that's not where the spending stops.
Quantitative Easing
Fed chief Ben Bernanke was on Capitol Hill this week for his semi-annual testimony on the economy before congress to face the heat about the economy, the deficit ceiling and possibly more quantitative easing.
All he did was reiterate what we already know: The US economy is not where it needs to be and that he has no idea how to fix it.
More importantly, despite saying there won't be a QE3 in past conferences, he came out and said that if the economy needs help, the Fed will step in.
Wait a sec...isn't that exactly what we all expected anyway? ( see Age of America Over?) Isn't this what he said before QE2?
It's like I said before, QE3 will happen in some form or another. That means more government spending and more reasons why gold will continue to trek higher.
The financial woes in Europe are also contributing to higher gold prices.
After the European markets closed Friday, the European Banking Authority said eight banks failed its stress tests, with a combined capital shortfall of 2.5 billion Euros. A further 16 banks narrowly passed the tests.
The PIIGS nations are on tilt, facing serious debt issues. Ireland, Spain and Italy are all on the verge of being dragged down by the deepening debt crisis. We haven't even come close to a real solution for any of their major problems. All that has been done thus far are merely temporary bandages that will eventually be peeled off to show a wound that hasn't healed.
I don't like talking doom and gloom, but reality is reality. That's why I am loading up on precious metals stocks while I still can. This boom will be big, but we can't be sure how long it will last. The goal is to make as much money as possible during this precious metals rally - which could be 2 or 3 years - to stave off the next 5 years. After the next few years, I expect a very slow and underperforming market with very little opportunity.
Back to Gold
Gold has everything going for it right now. It has momentum on its side and has clearly become an asset class that's being favoured as both a "risk-on" and "risk-off" investment. It surged over $50 for the week, and has gained $108 an ounce in the last nine sessions.
With interest rates where they are globally, you're not going to get any real returns. That's why smart investors, including banks, have flocked to gold. There's a reason why it's up over 500% over the last decade, while the markets have lagged far behind.
Gold is nearing the $1600 threshold - a number which anti-gold investors said will never happen. While profit taking could slow its momentum, the trend remains to the upside.
Don't worry. If you think you missed the boat on the gold and silver run, there's another ship waiting.
Large managed funds, including hedge funds, added to their bullish bets on gold and silver two days before gold hit this week's record.
Traders increased their net long position in Comex gold futures and options by 25% from last week. These managed funds added 45,576 long positions and 1,184 short positions in the period ended Tuesday, just two days before August-delivery gold hit an intraday record $1,594.90 an ounce.
Managed funds also added to bullish bets in silver. Traders in silver added 1,214 long lots and shed 661 short lots. This took their net position up 10% from a week earlier.
I've specifically said over the last few weeks that the time for picking up bargains is coming to a close (see Before It's Too Late ). Since last week, not only has gold and silver soared but the AMEX Gold Miners Index, the GDM, shot high into the 1600s, closing above 1,654. We also saw the GDX , the Market Vectors Gold Miners ETF shoot to the upside, nearly hitting $60.
Finally, the GDXJ, the Market Vectors Junior Gold Miners ETF, has climbed above its 50 and 200-day moving average. That's a very bullish signal.
The time is coming for the next big rally in stocks, but it won't be in your traditional large caps. The smart investors and the big money are about to unload their holdings in favour of stocks geared toward precious metals. This includes everything from speculative small caps which offer the best risk-reward leverage, to mid-tier and large cap producers.
My current holdings include all of them. They include small and microcap gold and silver explorers, to large cap producers.
Last week, I mentioned that HSBC has unloaded most of its physical gold holdings in favour of gold stocks (see Before It's Too Late). They're not the only ones.
Catherine Raw, who helps manage BlackRock's $4.7 billion Gold & General Fund, said the rise in the gold price has outpaced cost inflation in the industry, meaning that gold miners are likely to see their margins and their profits increase this year:
"I, as an investor, would say that in the end, given that believe the world isn't going to collapse, while there may be a good few months of volatility left, if you're prepared to be patient, then I would see now as a very good buying opportunity," she said.
As I mentioned last week, there are a lot of battered stocks trading near 52-week lows, but that doesn't mean they are all bargains. The key is to look for companies with great projects in mine-friendly jurisdictions, but more importantly, a management team that can get things done.
While there are many great management teams loaded with geologists capable of advancing projects, I said I will be looking specifically for those who are capable of raising money and supporting their own stock.
Too often I see great projects destroyed by teams comprised only of geologists with no market experience. I can't stress enough how important it is to have a management team with both strong market experience and geological know-how.
As a result, I am finalizing my report on a speculative junior gold explorer that has already begun to drill on a property with significant potential. They're in a prime location surrounded by millions of gold ounces, with a strong management team to back it up.
Those involved in this company have raised billions of dollars in the past and have discovered tens of millions of ounces of gold. These guys know what they're doing. More importantly, they know the markets.
The final report should be released sometime this coming week. Be sure to keep your eyes out for our next Special Report Edition.
When the time comes where we start buying our groceries and tv sets with cows and pigs, that's when gold won't matter.
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