On Tuesday, the U.S. stock market suffered its worst day in two months. The recent volatility in the market continues to breed uncertainty among sheepish investors who are still in capital preservation mode. In this brief commentary, I want to explain some of the reasons behind the recent volatility as well as discuss some of the buying opportunities that I see ahead.
As stated, the markets reacted violently to several major macro events this week.
1. The trouble brewing at Bank of America highlighting the extremely fragile financial sector. A group of eight major institutional investors holding $47 billion worth of Countrywide-issued mortgage-backed securities are set to sue Bank of America. Their claim: The bank, which purchased Countrywide Financial in 2008, is obligated to buy back the securities. The financial sector remains in a mess and investors will react quickly to bad news. For this reason, I have avoided all exposure to the U.S. financial sector. The cleansing process has yet to even begin in this sector.
2. A surprise interest rate hike by China. This week, the Chinese central bank announced its first rate hike since the beginning of the global economic crisis. In an effort to avoid inflation, China is doing the right thing by raising interest rates. Nevertheless, the minor 25 basis point interest rate hike to tame double digit growth in the country came as a “shock” to the U.S., who now officially has “inflation-creation” as its official Fed policy.
As the world’s current financial engine, growth in China has prevented the crisis from getting worse than it already is. Producing nations around the world are all growing more dependent upon China’s growing demand for their exports. Anything that may hamper Chinese domestic demand, such as interest rate hikes, will be a point of concern to governments and global corporations. This concern translated into the spooked markets which we witnessed on Tuesday.
3. A surge in the U.S. Dollar. While you would think that the surge in the U.S. dollar would be a good thing given all of the terrible news about the wretched currency over the last several years, the opposite is true when money is pouring into the commodity/energy complex at unprecedented rates. The U.S. Dollar is a fundamentally flawed currency and has entered the twilight of its existence in its current form. However, as I often say, nothing goes up or down in a straight line forever. The dollar will experience periods of relative strength. However, just know that the dollar is in a long-term downward trend. The beneficiary of this downward trend has been, and will continue to be, hard assets. The hard assets I am referring to are precious metals, agricultural commodities, and energy. Gaining exposure to such investments is vital for those investors who seek to outperform inflation over the coming 5-7 years.
The Dips in Hard Assets Can Represent Buying Opportunities
The strength in the price of gold has shocked virtually everyone who does not understand the dangers of fiat currencies over the last several years. This includes most commentators at the major financial media outlets. However, the recent price strength in the yellow metal has caused even those “in the know” to take a second look. Gold has been running directly upwards since late July after flirting with a major price breakout all through the summer. Notice the chart below which show gold’s run since late July to Monday of this week.
Two weeks ago, I issued a warning on my radio show to expect a pullback on the price of gold and silver. This week, a pullback did indeed occur in gold due to the surge in the value of the U.S. Dollar.
Tuesday’s pullback was a reminder that nothing goes up in a straight line. But it also represented a new buying opportunity for those who have been waiting on the sidelines.
Silver, which is one of my favorite investments for the next 5-7 years, has had quite a run over the last 2 months. See the chart below.
However, this week, silver also experienced a price correction as seen in the chart below.
Again, the pull back in silver represented another nice buying opportunity. However, it should be said that the buying opportunities that exist at these levels are for those who are investing for the long-term. Those who engaged in short-term trading should expect another pull back before making their move. Additionally, those with a long term investment outlook should seek to purchase physical gold and silver bullion as opposed to ETF’s or other “paper” gold holdings.
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