This past week saw a return to market selling with a significant slide at the end of the week. Even though we broke the consecutive weeks of market losses the previous week with a minimal gain, we are back at market weakness. As I have said, the markets are going to have to come down for the Fed to continue their economic stimulus. Quantitative Easing 2 (QE2) has just ended, and as a result, the dollar will likely rise, and downward pressure could be placed on stocks and commodities. Amid weakening stocks, rising interest rate pressure, and a weak demand for treasuries, the Fed will likely step back into the markets. This return of Fed support could send the dollar on another slide pushing commodities (including metals) upward.
The problem for investors is that as the market falls one of two outcomes could happen:
The first option is exactly what I have outlined which would mean stocks fall for a while and then get a pop later in the summer. Bill Gross of PIMCO funds made a very good point the other day regarding the timing of when we could see the Fed come back with stimulus. He surmised that the Fed will have something to say at its annual economic meeting in Jackson Hole, WY in late August. Last year the Fed indicated that QE2 was on the horizon at the same Jackson Hole event; this year it just may be the same. When more money printing arrives, the dollar will weaken further and the markets will likely rise.
The second option would be the markets could crater on a default in Europe, or some other event. Is anyone paying attention to China lately? Their interbank lending rate (SHIBOR) has shot up dramatically in the last week. Very simply, the interbank lending rate back in 2008 (LIBOR) shot up which was a result of the credit crunch. China finds itself stuck printing money to keep up with the US money supply while trying to tighten credit at the same time.
It is tough selling into this weak market because one of the outcomes could be higher prices later in the summer. On the flip side, we could be at the start of a significant leg down, especially if Europe does not get a handle on their weaker countries. The bottom line is that I must remain true to my strategy of managing risk and removing equity holdings that fall under their 200 day exponential moving average. This is still a point in time where you should protect what you have versus risking what you have. That may change at the end of summer.
Metals in Your Portfolio
Holding metals, even through the short-term pain of the price volatility, is the best medicine in today’s over indebted and excessive money printing environment. The price of the metals today does not matter. What matters is that metals holders have exposure to what has been economic protection for 3,000 years. Below is a great quote from the famed economist Dr. Marc Faber in response to the question, “At $1,500 an ounce, is gold still attractive?”
“Not to own gold is to trust the value of paper money and the government’s integrity. No one in his right mind could trust the U.S. government any more. The government’s statistics are distorted and there is no consensus on how to solve the budget crisis. So, yes people should own some gold. It can correct $100 or $200 an ounce but you own it as an insurance policy. The world is grossly underweight gold. It is flooded with U.S. dollars. Investors might be bearish on the U.S. dollar but international dollar reserves exceed $9 trillion. Compared to that, there is very little gold.”
Even though both the central and bullion banks do not want the metals to rise, their actions are doing nothing more than adding upward pressure to the metals. History tells us that the schizophrenic central banks (who want metals down, but are creating the opposite environment), will lose and the metals will win. Why? In the end, the metals will win because politicians will not vote for the tough medicine; they will continue to print money, and continue to bailout their banking friends. The longer this political corruption and laziness continues, the stronger the metals will become regardless of efforts to contain the metals.
Do you have an investment strategy that seeks to protect your portfolio against volatile economic times? Call me to schedule a free review of your current investment portfolio – 913.693.7918.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.