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"Gold is money, and nothing else." ~ J.P. Morgan [1] The recent downturn in many tangible asset areas has made many question their investment thesis. As I stand in place for Mike Hartman on today's Market Wrap-Up, I'd like to take the time to review the big picture before commenting on today's market actions. The amount of financial and economic commentary out in the world today is amazing! Within the resource investment sector alone we see hundreds of newsletters, articles, shows and commentary filled with technical and fundamental comments, many aimed at the short term. While I do believe many commodities or hard assets may overextend themselves and require one to take gains (we've heard a lot of negativity towards the base metals and logically so after such a run), we all might be better served if we occasionally clear our heads of some of the noise and focus on the larger picture. All primary trends have short term corrections. Despite my continual review of the multitude of financial, economic and investment related books, websites, newsletters and papers, I've learned the vast majority of private wealth accumulation (other than those who benefit from fractional reserve banking) is the result of accumulated from investors understanding the following:
Inflating any fiat (paper) currency transfers wealth from the creditor to the debtor. As central banks continue to inflate currencies (i.e., increase the supply of credit and money supply) to finance debtor governments, the inflation can manifest itself in various asset classes. In this "complex series of steps-the banks accept (government bonds) in place of tangible assets and treat (them) as if they were an actual deposit". [2] This increase in "liquidity" is happening, has been happening and it will continue to happen as best said by our current Federal Reserve Chairman in 2002. [3] The booming equity markets and housing markets in the 80's and 90's obviously benefited from this "liquidity" (again, increased money and credit). However, in the past 8 years the US stock indexes have remained flat with low yields while the investor in "things" has done very well. An objective person should note the move of liquidity into tangible asset-related companies and commodities obviously as a hedge against inflation and because the supply/demand relationships for many "things" point to higher prices. So here is the rub. The biggest supply of any asset today (bubble) is obviously United States denominated debt instruments (this includes the dollar and the creation of many dollar denominated derivatives). Somewhere, another United States denominated bond holder is going to learn the fact that their AAA rated bond does have one form of a credit risk (the default buy inflation/debasement). It's like my poor friends in the military; they will get their pensions (they lent their time, not their money to the United States Defense Department) but it's unknown whether their future pension payments will keep up with the devaluation of the currency. While I honor technical analysis and enjoy the insight of those who consult with us (such as the very bright Frank Barbera) I think we would all be best served by also reviewing the fundamentals. The third hour of Financial Sense Newshour this past weekend featured an interview by Jim Puplava with Bill Murphy of the Gold Antitrust Action Committee. Bill's website has been renovated and their dispatches are very insightful. If you aren't familiar with GATA, I'd recommend you start with this most important note. Essentially, there are various demands for physical gold but the investment demand may not only be greatly increased by individual investors looking for real gold (not a paper substitute) but also by Central Banks who are accounting for leased gold which is gone. In summary, short term traders must beware as the train may be leaving the station at any time. I think this could be very much the case for silver as well. And if you listen to Jim Puplava's comments since he's been back they are very similar to James Turk's comments. Many stocks could move higher as the market moves out of low yielding bonds looking for anything equitable or providing a real asset in an inflated economy. If you think my comments are extreme I suggest you listen to David M. Walker, Comptroller General of the United States. Comptroller Walker also recently gave a presentation (available online at http://www.gao.gov/cghome.htm). So the next time you listen to CNBC discuss the "price of crude oil" remember that the oil price may be going up. And there is also the possibility of the specific paper currency (i.e., the US dollar) may be buying less crude oil (resulting from an increasing supply of the specific currency). I'm not a technical guy but any investor should consider accumulating on dips when sentiment is low. This has been one of those times for the energy and precious metals sectors. So with this I'd like to review a couple of charts to hopefully shed light among the dark commentary this past month. While many gold shares have had nice runs in the past few years we can see the "un-hedged" index has yet to make new highs relative to real money.
This chart is very telling of the manic depressive world we see today. Could extreme change in sentiment be attributed to the evolution of 8,000 hedge funds today? Talk about sentiment change just within the past 6 months!
Finally, I thought I'd share a personal favorite. It may be interesting to see where this is next year!
Today's Market Unites States stock indexes advanced for the third straight session Wednesday, although the Dow Jones Industrial Average fell just short of touching its record high close after a jump in oil prices stifled investors' enthusiasm. Among the notable Dow components also helping the S&P 500 and Dow adhere to the smallest of advances was General Motors (GM 32.28 +0.87), which paced the way on the Dow with a 2.7% gain amid reports it is seeking billions of dollars from Renault and Nissan to make an alliance come to fruition. Gold and Silver also staged rallies as gold climbed back over the $600 mark. Today's industry leaders were silver followed by the Oil & Gas Equipment and Services. Natural gas today took another beating despite rising crude oil prices. One must still wonder about the effects from Amaranth Advisors. One last "must read" on this situation is by Ted Butler. It will be interesting to see what happens here as the American Stock Exchange Natural Gas index is holding steady. In the commodity world, it appears commercial traders are covering short positions in Crude Oil. Heading into the winter Natural Gas may be next. Outside the Home of the Brave, Reuters reported that the Toronto Stock Exchange's main index finished higher for a third straight session on Wednesday in a broad-based rally led by a continued bounce in resource shares as commodity prices moved higher. Mexican stocks fell from record territory on Wednesday after a jump in oil prices thwarted investor optimism and the peso also lost ground. The Brazilian and Canadian currencies rallied as well on speculation from various news sites on their resource oriented economies. Chilean stocks also rose to record highs for a second day on Wednesday, led by wood products maker Masisa and the retail sector, while the peso closed higher against the dollar. Soybean futures declined and grains ended mixed Wednesday on the Chicago Board of Trade. Wheat for December delivery rose 1 1/4 cent to $4.24 1/4 a bushel; December corn fell 5 1/4 cents to $2.53 3/4 a bushel; December oats rose 1 3/4 cent to $2.04 a bushel; November soybeans fell 4 1/4 cents to $5.42 1/2 a bushel. Beef futures were lower and pork futures finished mixed on the Chicago Mercantile Exchange. Wetsand.com is forecasting a south west swell in California with wave heights nearing 6 feet tonight! Have a great evening! Chris Sumner [1] Chapter 1, Gold Wars by Ferdinand Lips quoted Richard M. Salsman, Gold and Liberty (Great Barrington, MA: AIER, 1995) [2] Greenspan, Alan, Gold and Economic Freedom, 1966 [3] Remarks by Governor Ben S. Bernanke, Before the National Economists Club, Washington, D.C., November 21, 2002
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