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In one of my favorite movies, “Clockwise,” British comedian John Cleese plays a character who just cannot get to a very important appointment no matter what he does. And every time it seems the day is saved, he’s crushed again. Finally, he moans: “It’s not the despair … I can take the despair. It’s the hope I can’t stand.”
That’s the kind of market we’re in now. Just when we get used to doom, the sun comes out. Should we trust the sunshine? Or should we get ready for another onslaught of bad news?
That depends on which market you look at. I think the current trends are that rallies in the major stock indices are set-ups for future disappointment. And I think sell-offs in precious metals are opportunities for savvy traders and investors.
Stock traders are drawing hope this week from news out of China. The country’s $584.7 billion stimulus package — much of it spent on infrastructure projects such as railroads and electricity grids — seems to be yielding results.
The official purchasing managers’ index released by the Chinese authorities Wednesday rose to 49 in February, from 45.3 the previous month, and continued its improvement from a low of 38.8 in November. To be sure, a reading below 50 indicates contraction, so the February outcome does not yet represent recovery. But it was enough to spark a global stock market rally. And China is going to launch ANOTHER stimulus package.
However, the market is ignoring bad news here at home.
Why A Stock Rally
Could Be Short-Lived
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| Unemployment lines are swelling in the United States. |
I recently gave a webinar in which I told my subscribers about five forces that could weigh on any rally in stocks. Those forces are: (1) Deepening problems in the banking sector, (2) a worsening real estate crisis, (3) a massive unwinding of consumer debt, (4) a staggering shortfall in state budgets, and (5) a truly global slump. These five forces are all worsened by enormous public debt burdens.
And the latest news on the economy is not good …
- Unemployment is getting much worse than anyone thought possible. Employers have cut payrolls for 14 consecutive months, putting job losses in the current downturn at more than 4.2 million.
- Car manufacturers sold barely more than half as many new cars and trucks in February as they did a year ago. Projected out over one year, February’s auto sales rate would mean just 9.1 million cars would be sold this year. By comparison, 13.2 million new cars were sold in the United States in 2008 — and the last quarter of that year stunk!
- For me, the best measure of economic activity is energy consumption. Bad news there: The latest government records show U.S. inventories are awash in surplus crude, enough to fuel 15 million cars for a year. Inventories have grown by 26 million barrels since the beginning of the year alone. While the market gushed over a rise in gasoline demand in February, that figure will probably be revised down later. The latest revised — more accurate — figures available are for December and show a decline of 3.5%.
A World Of Bad News
Excess crude oil is a problem for the world. More than 30 supertankers, each with the ability to move 2 million barrels of oil from port to port, now serve as floating storage tanks.
It’s not just oil that is being stored at sea. Toyota is storing 2,500 unsold cars on a ship anchored off the coast of Sweden.
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| Falling demand has caused PetroChina to slash production. |
The market is also ignoring bad news in China. Top Asian oil and gas producer PetroChina (PTR) has cut its domestic production targets for 2009 by 10 percent to 20 percent at many oil fields because of falling demand. China’s economic growth slowed to the weakest pace in seven years and 20 million migrant workers have lost their jobs.
There’s also the question of whether China is telling the whole truth about its economy. China’s official forecast is for gross domestic product (GDP) growth of 8 percent. Many economists believe China may see growth of only 5 percent or 6 percent this year. And some think China is already stagnating — with real growth near zero.
It’s funny, also, how so many Americans look to China to save the world. I remember when America used to save the world. Maybe it’s just me.
My point is, I don’t think investors in the major stock indexes should get too attached to hope. Despair may come back with a vengeance.
On the other hand, let’s take a look at gold.
Pullback In Gold Is An Opportunity
Gold came under pressure recently, as supply and demand came into balance. But a slowdown had to come sometime, especially considering how ETFS have been devouring gold. The SPDR Gold Trust (GLD) alone added 175.92 metric tonnes to its hoard of gold just in February. GLD increased its holdings 31.9 percent in the first two months of the year, and ETFs around the world now hold more gold than the Swiss Central Bank.
So it’s not surprising to see some pullback. And again, ETFs are leading the way.
- All of the gold ETFs sponsored by the World Gold Council showed a collective reduction of 1.39 tonnes to their gold holdings to 1,203.36 tonnes as of the Friday, Feb. 27, cash market close.
- Meanwhile, gold scrap selling has ramped up — hitting 600 kilograms on one day recently.
- Finally, as gold neared $1,000 an ounce, the large COMEX commercial metals traders seemed willing to take the short side against all comers.
But you know what? These are all short-term forces. And the long-term forces for gold (and silver) are very strong. Despite strong demand and sky-high prices, there is not enough new mine production coming online. Gold mine production went down (again!) last year and will probably be flat this year. Meanwhile, ETFs and other investment demands are rip-roaring, and more than making up for a decline in jewelry demand.
Moreover, the forces pushing gold higher in the longer-term are being enhanced by the frantic efforts of governments around the world to stop the global economic slide.
That second stimulus plan in China? That’s more paper money being created. We shouldn’t point fingers, of course. The United States has spent or pledged about $9.7 trillion in various stimulus and bailout packages.
The U.S. Federal Reserve, Treasury Department and Federal Deposit Insurance Corp. (FDIC) have lent or spent almost $3 trillion over the past two years and pledged another $5.7 trillion if needed, according to a recent tally from Bloomberg News. That adds up to almost two-thirds of the value of the entire GDP for the U.S. economy last year.
America’s annual government deficits will be more than $1 trillion for the foreseeable future. Our World War II deficits were three times this size as a percentage of GDP, but nothing since then comes close.
Meanwhile, the credit default risk on 10-year U.S. Treasuries is rising, as investors price in the risk — the growing and tangible investor fear — that U.S. debts will become insurmountable and that America will eventually default.
That probably won’t happen, but if it does, do you think you’ll want to own gold and silver? And how!
My target for gold is a near-term pullback as low as $880 an ounce. My target for silver is a near-term pullback as low as $11.50 an ounce. These should be great buying opportunities.
Could gold and silver go lower? Sure they can. And there is support below the levels I just listed.
2 Ways To Play The Next
Rally In Precious Metals
So, let precious metals pull back. I’ll load up for the next rally. I’ll use ETFs, including SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV), as well as other ETFs that are leveraged to the underlying metal, to make the most of big moves higher.
On the other hand, I think stock market investors should beware rallies — it’s all too likely you’ll see hope give way to despair. There are ETFs that will let you play the next downleg in stocks — for example, the ProShares UltraShort S&P 500 ETF (SDS) targets twice the inverse of the daily movement in the S&P 500 — but they are as volatile as dynamite. For Pete’s sake, if you’re going to use inverse funds, use protective stops and get professional recommendations on when to get in and when to get out.
All in all, for both markets, I expect a lot more volatility — big swings up and down. Hang on to your hat and prepare for profits, but it’s going to be a bumpy ride.
Yours for trading profits,
Sean
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Global Wealth Report (GWR) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in GWR, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in GWR are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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{ 2 comments… read them below or add one }
Mr. Sean, I liked your this article which is very helpful to those who want to be into the market no matter how much worsen has the time been become ..
I believe, that’s the time to play with metals and their ETFs rather than betting on stocks ..
I wish to subscribe to all your reports.