Saturday, December 27, 2008

Gold and Oil in 2009

So many are saying that it will be great to end 08 and begin 2009 as if the fundamental were going to drastically change as the ball drops on December 31st. Sadly enough many investors will refuse to look at the truth and will happily find data points to interpret their "wishes". The simple fact is that gold is headed up and the dollar is headed down. I wish that I were sitting here stating the facts that we were headed into a bull market because of the fundamentals---but I AM NOT. I often draw criticism in the form of comments and emails from people who simply state things such as "You are wrong" "You are going to lose tons" and other petty comments that offer no argument as to what is really happening in the markets. I find that these comments come from those who are already frustrated with their investments and simply don't like where I see things headed. They fire back because they are not hearing what they WANT TO HEAR. Wanting does not make money---holding and wishing tends to cause more losses.

I believe that Gold broke out on Friday. I expect gold to break the $1000 mark in the first quarter of 2009. The fundamentals for gold are painstakingly obvious. Our government has been printing paper money and is weakening the value of the dollar. Seriously, if you were an outside investor and you looked at the fundamentals of our economy---would you really call the dollar a wise investment. Would you really purchase the common stock of a company that had just made a huge secondary offering? One that would be very dilutive and utilized the funds for past ills, rather than for future growth? I certainly would not, and this is a very good analogy as to the fundamentals of the dollar. One may argue that it holds certain inherent value "goodwill" so to speak as the worlds reserve currency. Do investors hold the best "brand" stocks as the fundamentals deteriorate? Perhaps they hold on to the best brand "longer" than the rest, but not forever. The dollar will decline, it may see pockets of strength that serve as headfakes, but the overall trend for the dollar is definitely down. This is creating the fundamental basis for perhaps the greatest bull run in commodities in history with gold leading the way.

The Bernie Madoff scandal only strengthens my already solid basis for believing in gold. Gold is a store of value in every country throughout the world and with scandals such as the recent one with Madoff, more investors are looking for that safe place to store their value.

Many people ask me if my views are extremely bearish for all U.S. stocks because of my views on the dollar. Overall, I am bearish on equities even though I think we are going to see a strong bear market rally in the near future. Many equities are going to continue to see multiple contraction and get cheaper. I like FCX as I believe that gold is going to make a run and I expect copper rebound during the year. The company is well run and got ahead of their game by cutting their dividend. They have a strong balance sheet and will see a vastly improved economic environment through 2009 as compared to the latter half of 2008. I am counting on this one as a double for 2009.

Energy equities are another excellent place to be in a declining dollar environment. Make no mistake, the oil trade will be tricky---especially in the short run. The spot market is lower than the front month futures and most experts will tell you that this is bearish in the near term. I am more concerned with the intermediate to long term with respect to oil. When oil made its run from $115 up to its peak of over $140, the equities such as Exxon, Chevron, etc did not make a corresponding run and those stock were telling us that oil was overvalued. Similarly right now those equities are not getting hit when oil makes wild swings to the downside. Are they telling us that prices are unrealistically low? Yes they are. If you can weather the short-term volatility--the USO is a good investment right here. Just as the declining dollar will have its certain long term effect on gold---it will on oil as well. I like several of the exploration companies and will detail the specific stocks in upcoming posts.

My views may not be popular and again, I wish I were sitting here forecasting the great bull market run of 2009. We will continually monitor inflation and the multiple factors that contribute to how fast it will grow. Many will be fooled by short term factors and they will wishfully label them with terms such as disinflation, deflation and other inaccurate terms. To make money in this market--you must call it what it is---INFLATION. Accept it and trade with it!!


mact said...

an interesting could very well be correct although I dont think it will play out that way...yes one day we will have severe inflation but I dont think it will be right now or even next yr.

While the govt is pouring trillions of dollars into the financial system it isnt getting to mainstreet...the M3 money supply appears to be rising sharply but in reality it is not due to the banks hoarding the money...even the auto co's and etc will keep the money just to stay alive because there wont be enough to invest for the future.

Also, the velocity of money is slowing see, the true money supply grows when people take out loans and this isnt happening...matter of fact, much of the money used by our society over the past 5 yrs was from tapping the home ATM for HELOCS...this accounted for 3-4 % of our positive GDP during this time frame...this is card co's will reduce consumer credit by 2T over the next yr and this is highly deflationary....this affects the mkts more than govt actions because 70% of our economy is consumer spending.

If you truly think commodities and gold will rally in 2009 then you should also think the equity mkts will rise to(ie-the bear mkt is over)...the energy and financials make up 30% of the SP 500 now and these sectors will lead the mkts once I just cant see how the equity mkts are done going down...whether we bottomed on 11/21 or will do so soon it doesnt matter because in every scenerio we will have a 50% retracing bear mkt rally for a few months but then the selling will resume(ie-make new lows)...if you believe this scenerio like I do, I just cant see how oil, gold and steel/fertilizers are going to have a substantial rally other than the brief yet significant bear mkt rally that we are either in now or will be in soon enough.

To me, this isnt the 50% rally I am expecting...the mkt internals are too weak...the wave 4 bear mkt rally should be explosive and have volume...I think were going to make new lows within the next 2 months and then have the explosive bear mkt rally retracing 50%...jmho of course...GL.

Anonymous said...

The fact that the reasons to buy gold are painstakingly obvious to you are the exact reasons why it is a bad investment.