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The U.S. broader market indexes have pushed to new 2012 highs over the past two trading sessions. Along with the equity move higher; gold, silver and oil have all followed suit. A combination of perceived European economic stability and more Federal Reserve bond-buying have delivered a 10% rise in equities, a 25% rise in WTI oil, and (gasp) a 27% increase in silver price over the past two months.
One must dig only slightly beneath the surface to realize this multi-month broad rally, now dubbed “the most hated rally” on CNBC, is based on nothing but a hope and a prayer. In the aggregate, corporate earnings only beat negatively-revised estimates by the same amount they have historically. Oil demand has been continually declining, and China and Indian central banks have eased their gold buying operations.
Overall, demand for investment-grade vehicles continues to decline, both in the U.S. and worldwide. For investors seeking a sanctuary in gold or European or U.S. equities, the six-month outlook is not promising. Now, temporary upward moves are sure to occur, but “buying and holding” in this economic climate is not prudent.
It seems more and more likely that the U.S. Federal Reserve will implement another round of bond-buying (QE3); however, there is still no indication that U.S. fiscal issues are any closer to being resolved than they were at this time in 2011. Until there is legislative movement on the Federal level by the Congress to guarantee a growth-promoting economic climate, our problems will continue, and get worse. One must look no further than the tepid monthly job growth through the summer.
So, what’s the move? Well, as detailed in “An Ounce of Gold will be $800… ” there are several strategies that may prove profitable over the next six months:
First, short silver. At its current price of nearly $34/ounce, the “poor man’s gold” is actually just the sucker’s gold. Silver is an industrial metal, and even though it has been considered a hedge against inflation and store of value, it really is just an expensive industrial metal. Look for a 50% move down in silver.
Second, sell gold. I don’t like shorting gold because it is an internationally accepted store of value, and a true hedge against inflation, but at these bubble prices, gold is much too expensive to buy at these levels. I’ll wait until sub $1000.
Third, short U.S. stocks. Unlike European equities, many U.S. stock valuations have held up and even soared over the past six months. The notion that European problems can be isolated to Europe is absurd.
Right now, Europe is off the radar, as the ECB has said they will buy an “unlimited amount of Spanish and Italian bonds.” The problem with this strategy, much like in the U.S., is monetary policy cannot correct fiscal issues!
Fall 2012 may be when Ben Bernanke and Mario Draghi find out that artificial demand for U.S. and European bonds is, at best, a short-term patch for an economic emergency, not a long-term solution for a structurally-deficient economy. Don’t be the one holding their bag!
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