The Fed Holding the Line

Posted by Ray on August 12, 2009 under Main | 2 Comments to Read

The Fed notes are fairly interesting in that they said absolutely nothing new or bullish. In fact, besides soft peddling the bad data, they said the same thing as the last meeting with the exception of keeping the quantitative easing until October of this year, which will be extended again next meeting I am sure. Regardless, the Fed actually confirmed that the consumer is stretched and broke while businesses are cutting back on investment.

I guess the good news is that they are keeping rates at near zero and the QE program. If the economy leveling out means it is dropping at a significantly less rate then I would agree. Unless they are seeing different data from what is available to me, Dave Rosenberg, Peter Schiff, and on and on then I do not see what they view as positive. Regardless, stocks liked it, a lot, which allowed me to sell out of my US holdings to a risk adverse level.

I lowered my US holdings to 10% and reduced my foreign exposure to 20% leaving the rest in corporate bonds and short treasuries. I am grateful for today as I was kicking myself for not reducing my holdings to these levels last Friday. I may miss out on a couple of points, but I am convinced that a serious correction is heading our way which will trickle into the foreign markets. However, I am still holding my PCY, which has done very well for me especially as the dollar continued its downward trend today.

In a nutshell, there was nothing compelling about any of the news today even the real estate news was not that positive. Unless you consider rising property values in Elmira NY good news, Elmira is a town about an hour from where I live and its biggest employer is the prison system, so what does that tell you? Furthermore, inflation is still tame, even from my view, but I believe the weaker dollar will have the same impact as inflation over time which is why I still hold my GLD and SLV, which is not accounted for above, but it represents about 13% of my total holdings.

We will have to see where this goes, but my guess is we are in for a rude awakening in the near-term. Because of that I would keep some powder dry to go in when we are lower in the indices. A rally with virtually no selloff is simply not healthy and I hold my opinion from last Friday and recommend cash as a significant portion of your portfolio as we are right about where we were last Friday, again.

The Dollar, Markets and Gold

Posted by Ray on August 11, 2009 under Economy, Markets | Be the First to Comment

We have had a nice rally in the dollar which has cooled a bit today, but it should have spelled disaster for gold, but it did not. A higher dollar also means equities are under pressure and yesterday we should have had a nice selloff instead of a flat day, more or less. However, the real story is gold and its ability to not get crushed under the weight of a strengthening dollar.

Those who read my articles regularly know I am bullish on gold, mostly as a hedge against a weak dollar, but also for long-term inflationary pressure. Regardless, a higher dollar usually spells disaster for the price of gold and while the price has reached, in my opinion, a nice entry point it has held up rather well in the face of the dollar. This is telling me that clearly demand for the yellow metal is in high demand and the fundamentals remain strong.

It is also telling me that the flight to quality has begun as the dollar increases, gold increases and equities decline. As stated several times, the market has priced in perfection for economic growth which should scare you to death because we will never get perfection. The fundamentals of the economy remain weak, regardless of what you are hearing or reading, and this weakness will become apparent moving forward into the fall.

I think it is evident that 3Q GDP will surprise most, but not at a 4.5% growth rate. I think a number of between 0-2% is about right, but hey let’s not let the facts get in the way of the new bull market. Unemployment, housing and commercial real estate are the major weakness in the economy and until we get actual stabilization in these areas, not just a one month reading, but a multi-month reading, then GDP will not grow at some of the ridiculous numbers of 4%+ that we hear being kicked around.

As the dollar weakens today we will see some strength return to equities, but we will also see gold move higher as well. I do not think this trend is long-term as I believe that firms are positioning themselves for the flight to quality that will happen in the next 30 to 60 days. The fall is usually weak for the markets and this is a cyclical move, in my opinion, however the coming market turmoil that is expected will exacerbate this move and we should see nice dollar gains followed by higher gold prices.

I believe that we will have several entry points for gold so I would recommend dollar cost averaging in over the next couple of weeks, buying on weakness. I really like the metal below $960 an ounce, but it could go lower, but I am a long-term bull. Volatility is going to be high in the near future so buy with your head, not your emotions. If you want to trade it then use charts and disregard my comments as I am a holder of the metal, not a trader. If gold is too rich for your blood then buy silver which I believe has plenty of upside potential, perhaps even more than gold especially longer term.

I own the GLD and SLV.

Gold, a Liquidity Bubble

Posted by Ray on August 6, 2009 under cnbc | Be the First to Comment

CNBC interviewed Gold Fields CEO, GOLD, and questioned him about investment demand citing investors are not fearing inflation, which is not true. Mark Haines, who I like, then went on to ask if ETF ownership is creating a liquidity bubble in the yellow metal. I guess this is a legitimate question, but when you add up CNBC’s position on gold it is always negative.

I see a pattern of anti-gold bias on CNBC even as most people recognize gold as a legitimate investment and hedge against the dollar and inflation. The irony is that Fast Money had an advisor from Morgan Stanley on last night who is an ultra wealth advisor and they asked him directly about the gold and inflation trade. The advisor did say that his clients are concerned about inflation and the dollars weakness, which means they are buyers of the yellow metal.

I am by no means a “gold bug”, I find that name so insulting anyhow, they do not call stock fanatics, “stock bugs”, but I recognize the importance of gold in a portfolio and own it myself. I believe any well rounded investment portfolio needs to have exposure to precious metals and other inflation protection investments. To not have that exposure is crazy.

Either way you cut it CNBC definitely does not like gold and consistently “talk it down.” To clarify, I do not believe CNBC is holding the price down, someone accused me of that before, what I am saying is they dismiss gold as an investment which is inaccurate at best.

Disclaimer: I own the GLD, SLV.

Unintended Consequences: The Dollar’s continued Decline

Posted by Ray on August 5, 2009 under Main | Be the First to Comment

Whether it is really an intended consequence or not is up for debate, however what is clear is the dollars rapid rate of decent to the basement. The index has been lower in the past, but the economic crisis last year boosted the dollar’s strength against every major index until the early part of summer when the risk and inflation trade kicked into high gear.

The consequence of a weak dollar is of great concern to me as it has consequences that most Americans either do not know about or do not fully understand. A weak dollar is good for our exports, but it also has an inflation factor for us that can sneak up on people. Commodities are priced in dollars so when the currency declines everything we use on a day-to-day basis increases such as gas and food. While the government thinks that gas and food have no or limited inflationary effect on people, I have to disagree since most people like to eat everyday and occasionally fill up their gas tank.

There is no question between the correlation of a weak dollar and the upward momentum of the equity markets. There are various reasons why the market has gone up over the past few months, it was massively oversold, but clearly the weakness in the US Dollar was perhaps the largest contributor to equities gains. As you can see below, the correlation is obvious between the dollar’s weakness and rising equity prices. Although there seems to be a decoupling between the two over the last few days, the longer term correlation is still very evident.

Every time the dollar declines 1% we see about a 1% increase in equities which means there is no real gain in stocks as Americans buying power was simply reduced. The reason for the dollars decent, which has been years in the making I might add, is because of our loose monetary policy. That policy has become increasingly looser since the beginning of the financial crisis and the saving grace of the US dollar was its liquidity as investors bought up dollars at a record rate last fall.

There seems no sign from the Fed as to when interest rate tightening might happen although many think interest rate hikes are closer than we think. Tightening our interest rates is the best way to support the dollar along with fiscal responsible spending which would mean no more spending by our government at this point. However, personally, I do not think the Fed has the stomach to tighten rates anytime in the near future, perhaps in 2010, but the Fed has been influenced way too much by the markets. In my opinion the Fed has abandoned its original role

On top of a poor monetary policy we also have massive amounts of debt being issued by the Treasury which is diluting our dollar even more. At this stage, we are heavily dependent on foreign governments to buy our debt. We saw what could happen if foreign governments slow or stop their purchases during last week’s 2 year auction where the bid-to-cover was 1.92 and rates shot up. If foreign governments stop buying our debt we are in huge trouble and will have to do more “quantitative easing” than we currently do now.

If the dollar index continues to slip then we could be facing huge problems such as losing our status as the world’s reserve currency. The only thing preventing that now is the fact that there is no other market that can handle being the reserve currency. The Euro and Yen are contenders, but those markets still are not as deep and liquid as the treasury market.

However, if we do loose our reserve currency status or the dollar index slips into the 60 area it is possible that foreign bank’s start dumping the dollar which could start the beginning of a crisis in the US dollar. As of right now I see an orderly exit out of the dollar, but if the orderly exit turns into a run for the exit because someone smells a fire then that is when we will have a big problem. It could very easily turn into a dollar collapse and no one is really sure what would happen because it has been unfathomable at any other time in our history.

Not only have we never seen anything like that in our lifetime in America, but most people think it could never happen, presumably because we are America. Not only could it happen, but eventually it is more than likely a probability that it will happen. Clearly no one knows exactly when or how it will happen, if it happens at all,, but one thing is for sure it will be because of a lack of confidence in the US dollar.

I do not root for such a thing to happen and I hope it never does happen, but at the very least it looks as though that the greenback will have some tough times ahead. This is one of the reasons why I am bullish on international investments, gold, silver and other hard assets as they are a hedge against a weak dollar. Buying commodities is one of the best ways to protect your and preserve your buying power.

GLD: Looking Good

Posted by Ray on August 4, 2009 under Main | Be the First to Comment

Gold has been on the move lately thanks to a weak dollar, but today we had a move that did not coincide with the dollars weakness. The dollar remain relatively flat today as gold added another $8.80 to close about $969 which has been a fantastic 2 day run.

I would wait for a pullback before opening a new position as there may be some near-term weakness in the price if the dollar firms here. I expect the dollar to continue its weakness moving forward which will be good for the yellow metal and I was very pleased with the flat nature of the DXY today and the upward price of all the precious metals. I am a long-term gold bull and think there is significant upside espcially if it can break and hold about the magical $1,000 level.

If the dollar continues its slid overnight, which it looks like it will so far, then tomorrow could be a very interesting day. The fundementals do look good for gold as production is down and demand is up. If Cina is in recvoery mode then that will put continued pressure on supply as well and if the US does recver this year, which I do not believe will happen, but I could be wrong, then there very well could be a strong move to the upside. It is also important to note that summer time usually provide a good buying opportunity as the price is depressed while the fall we usually see price appreciation.

Either way, I like it, but would wait for a pullback before pulling the trigger.

I am long the GLD, SLV