Reiznersway Investment Articles

Is Taking (Some) Stock Market Profits Appropriate Now?

Fri, 23 Oct 2009 13:42:39 -0800

The stock market may continue to rise - but realizing partial profits at the present time and in the manner described below may be a way to protect your portfolio from a correction and enrich your emergency kitty. In this article, I describe price ranges on the Dow Jones futures continuation chart which may be levels to consider for such investment actions. The Dow Jones closed at 10,038 on the continuation chart on October 22, 2009.

The widely watched 50% Fibonacci retracement level from the October 2008 - March 2009 decline rests at 10,363 on the Dow chart. This may be the first line of resistance for the stock market rally continuing into October 2009, one that may be exceeded in my opinion. The next bands of resistance appear around the 11,129 range on the daily chart and between bands of resistance of 11,899-13,045 on the weekly chart (editor's note: charts will very soon be featured here on a regular basis).

But more importantly, the target range of an inverse head and shoulders pattern on the weekly chart rests at approximately 11,490. The 0.618% retracement level also rests at 11,272. Both of these ranges are near the daily resistance range mentioned in the preceding paragraph.

I may take some profits in equities should the Dow rise between 11,129 - 11,490 including intraday price action. Should the general market continue to rise from that band to the higher weekly band of 11,899 -13,045 on the continuation chart, I may take more profits.

As I have stated before (see related articles below), the long view is best when considering equities. We have just endured a huge stock market crash and credit contraction. Unprecedented government spending by way of our national credit card and Ben Bernanke's monetary ease are giving the financial markets a good ride now.

These policies may produce higher inflation down the road. Should a future Fed exit strategy "cool off" the economy, the stock market may suffer. I do not believe the authorities will exit from monetary ease if the economy takes another dive. The dollar could continue to fall and stocks may rise as more and more money is printed.

On the other hand, if the economy does reasonably well, the stock market may remain fairly buoyant, though it may experience corrections of 25-30% such as we experienced after the dramatic 22 month 76% rise in the stock market from the 1974 bottom in equities.

I have sold stock in the month of October. I am considering whether to sell a portion of my non-inflation hedge positions should the scenario described in this article occur. I currently maintain positions in various oil and gas industry companies, other equities, domestic and international stock funds, agricultural, natural gas, and silver ETF's, the Franklin Templeton Hard Currency Fund, gold and silver.

Stock Market Rally Supported by 20% of Consumers with Substantial Assets

posted September 18, 2009

Stock Market Bull Run May Last say Two Top Performing Money Managers

posted September 9, 2009

Economist Richard Hoey Sees Stock Market Climbing a Wall of Skepticism

Silver Rally: Is It Ready for Primetime?

Fri, 25 Sep 2009 22:46:58 -0800

Silver is once again garnering attention as it traded through the $17 per ounce barrier this week.

I am adding detail to my previous post that the case for a sharp increase in the price of silver may now be clearer. At the time I wrote that piece, silver had closed for the trading month of May 2009 at $15.73 per ounce on the futures continuation chart. I stated that the silver price could touch the $17 - $20 range, with the possibility of reaching the old 1980 high range of $32-$42 within one to two years in the form of a blow-off top.

In fact the price rose to a high of $16.25 shortly thereafter before going into a correction. Silver has since rebounded, reaching as high as $17.69 while closing for the week of September 25, 2009 at $16.06 on the futures continuation chart. In view of this action, where might we go from here?

Baby boomers may remember the parabolic rise in the silver price culminating in January 1980 as the Hunt Brothers attempted to corner the silver market. In examining the current position of the silver market, it may be informative to briefly consider some history.

In my view, there were two stages to that dramatic 1980 market top. In the first stage, silver traveled from a substantial low of $6.05 per ounce on January 15, 1979 to $9.30 per ounce on August 13, 1979. This journey represented a 64% price increase in a period of 31 weeks.

The second stage, a rapid price ascent, carried the price of silver from $9.22 per ounce on August 20, 1979 to as high as $41.50 on the week ending January 21, 1980. This 450% increase in silver took an additional 23 weeks to accomplish.

Both stages together totaled a 686% rise in the silver price in a time span of 54 weeks (from January 15, 1979 to January 21, 1980). It was basically one large move in silver, divided into a bull phase and a parabolic final stage.

Though it may be impossible to be certain, we may now be in time for the finish of the bull move in silver. In my view, the substantial low for silver before its current bull market began was at the beginning of July 2003 at $4.545 per ounce.

Stage one for this run lasted 55 months traveling to a high of $21.40 per ounce on March 6, 2008 for a gain of 471%. After this bull run, there was a retracement to the $8.40 per ounce level, from which silver has increased its current price.

Might stage two of today's run in silver complete a similar move as the 1979-1980 bull market? In that event, silver could rise over $31 per ounce, similar to the conclusion from my earlier post. Support on the downside appears first at $14.71 - $15.62 per ounce. If the low of $12.435 per ounce is violated on the weekly continuation chart, then this particular uptrend could remain in question.

Another possibility is that we may see a 600% plus move from the recent reaction low of $8.40 per ounce - which would bring us to an eventual target range of $50 - $58 per ounce.

Aside from the key limitations of chart analysis (editor's note: charts will be featured soon on this site), I think the fundamentals may carry the day. The Board of the IMF has approved the sale of over 12.97 million ounces of gold or $13 billion to be sold to central banks and gingerly sold on the open market. If the sale wins approval from the appropriate government authorities, gold might be affected negatively and silver could fall in sympathy. But this might provide a deeper buying opportunity.

The American government and Federal Reserve's current campaign to bring the economy out of the hole seems to be benefiting the stock market. It is only natural that inflation at this time is somewhat quiescent as the economy only now appears to be emerging from a very deep recession. What remains is that monetary excess usually leads to greater inflation down the road - which might be two or three years from now.

Gold and silver may benefit from an increase in inflation expectations. Gold is now more regarded as a store of value against an increasingly fragile U.S. dollar, though we do appear to be in a somewhat optimistic phase of the precious metals bull market. It is possible that the extent of this bull market could surprise on the upside.

I currently own silver bullion and SLV.

Protect Your Investment Portfolio from Inflation and Rising Interest Rates (and Ben Bernanke)

posted July 21, 2009

Why I Sold Part of My Gold Position after a Six Year Hold

posted June 23, 2009

Silver Market May be Embarking on Important Price Rally

posted May 30, 2009

Stock Market Rally Supported by 20% of Consumers with Substantial Assets

Fri, 18 Sep 2009 20:25:46 -0800

The stock market continues to rise to a disbelieving chorus of many hedge fund managers who are simply along for the ride and a mostly noncommittal investing public. Readers of my blog may know that I am invested in equities, various mutual funds and ETFs, and gold and silver.

The Dow Jones futures contract on the continuation chart closed at 9733 on September 18, 2009. A 25-30% correction in the Dow would not be unwarranted, though it may occur from a higher price level. However, there is weekly chart support at the 8640 area on this contract and a daily support band between 8290-8415, either of which may act as a barrier to further decline should a correction ensue. I expect these support ranges should hold. Note: this website will soon present charts on a regular basis.

As I reported in my July 28, 2009 article, "Is the Stock Market Rally for Real?" (see related articles below), BNY Mellon & Dreyfus Chief Economist Richard Hoey's declared that a "classic recession bottom" is in place and he expects 3% plus growth in 2010. Hoey sees the 20-25% of consumers who still have assets left carrying the weight for his projected economic turnaround. Hoey added that "I don't think you may ever lose big money in the stock market buying at the recession trough."

The Wall Street Journal reported today that "for the first time in nearly two years, households grew wealthier. Household net worth grew 3.9% to $53.1 trillion in the April-June period from the first quarter." The financial journal continued that growth in investor stock portfolios was a major part of the increase, but also that households have cut their debt for four consecutive quarters. Also, home prices are increasing in many parts of the country, which augurs well for next quarter.

I would add that the minority of investors with significant assets invested in equities may feel richer as stocks have rallied and some of these investors who have jobs may feel a bit more secure in them. Others may be buying stocks or reallocating to gold or silver in order to hedge against an expected inflation.

More well-off consumers who feel as if the worst has passed may reward themselves by spending a little of their newly reclaimed wealth. The rich may not be back to where they were before the Crash of 2008-2009, but their mood may certainly be better.

Just about everything that can happen has happened to this country economically and to the stock market in the last year. I won't spend time here going through the laundry list of events and government actions that have been the subject of many "Last Year of Crisis" programs on popular financial television networks lately.

The widely discussed 50% Fibonacci resistance area on the Dow rests at 10,363 on the Dow futures continuation chart. There is no other resistance on the daily or weekly charts at this Fibonacci level. More importantly in my view, the next ranges of resistance are between bands of 11,050-11,554 on the daily chart and of 12,235-12589 on the weekly chart.

So I expect the first area that the Dow may reach to be the lower daily band, where a correction may ensue. Should that band be exceeded, I expect the higher weekly band may stall the advance.

My investment positions are unchanged from my last post. I continue to hold gold and silver. The Franklin Templeton Hard Currency Fund, which can invest in countries with low inflation, continues to benefit from the dollar's decline. Many inflation hedge stock and ETF positions are participating in the equities rally.

I will stick my neck out and say that the longer term picture for stocks may be brighter than many might imagine. If the March 2009 low of 6469 on the Dow turns out to be as important as the 1974 low of 577.60, then we may see a series of shorter term bull and bear markets within an overall loose trading range for several years. Should a long term multi-decade bull market liftoff occur after that trading period, such as the long term bull that began in 1982, some seven years after the 1974 bottom - then reality might look brighter for stock market investors.

But for now, the market is rising.

Stock Market Bull Run May Last say Two Top Performing Money Managers

posted September 9, 2009

Economist Richard Hoey Sees Stock Market Climbing a Wall of Skepticism

posted August 10, 2009

Is the Stock Market Rally for Real? "Yes," says Richard Hoey of BNY Mellon & Dreyfus

posted July 28, 2009

Why Long Term Investing in the Stock Market is not Dead

posted December 8, 2009

Stock Market Bull Run May Last say Two Top Performing Money Managers

Wed, 09 Sep 2009 20:34:16 -0800

Both top performing former Mutual Series Funds manager Michael Price and Dreman Value Management's David Dreman concur that rising stock prices in the coming years may present opportunity for stock market profits - if you are invested in the right stocks and if you understand the economic nature of the "recovery."

Bloomberg.com reported on September 9, 2009 that Price, who sold his Mutual Series Funds to Franklin Resources in 1996, is finding value in selected equities in today's market. He sees similarities between the 1974-1982 100% stock market rise, and today's 50% ascent from the March 2009 bottom of 6469. The 1974 market trough to which Price alluded was a once in a generation buying opportunity, when the Dow ascended from a low of 577.60.

The Dow Jones Industrial Average closed on September 9, 2009 at 9547.22. A doubling of the Dow Jones index today from the March 2009 bottom similar in magnitude to the 1974-1982 run would result in Dow 12,938. If this occurs, it could take quite some time to develop.The March 2009 stock market low may be as significant as the 1974 trough (see related articles below for more on this subject).

Price advises investors to do their homework and to be selective - he points to companies with sound long term fundamentals that are beaten down by Wall Street after missing earnings estimates.

In the September 7, 2009 edition of Forbes Magazine, David Dreman says not to worry about timing the stock market and to think "about the purchasing value of the dollar." A wide swath of Americans and many non U.S. investors are well aware of the risk to the domestic and international value of the U.S. dollar posed by the Treasury printing money and reckless government spending under the thin guise of fiscal restraint. The September 09 dollar index contract closed September 8, 2009 at 77.34 and the index looks to be continuing its long term decline.

I agree with Dreman that current Fed policies may eventually lead to a greater inflation than the late 1970's as the Fed may not be able to gracefully exit from its current monetary accommodation in time to stop escalating prices or without grinding the recovery to a halt.

Dreman's advice is to "buy stocks, buy real estate, and sell bonds." I would add that owning assets may be the only way to protect your dollars' purchasing power if an inflationary economy develops over the next few years. In the 1970's inflationary economy, integrated oil equities, oil, physical gold, foreign currencies such as the Swiss franc and the German mark and real estate were fine investments.

I still maintain my positions in physical gold and silver, inflation hedge style equities, various other equities, agricultural and natural gas ETF's, and global and domestic mutual funds. I have sold my position in the Currency Shares Japanese Yen Trust (a temporary investment), but retain my position in the Franklin Templeton Hard Currency Fund, which has been benefiting from the declining dollar.

Economist Richard Hoey Sees Stock Market Climbing a Wall of Skepticism

posted August 10, 2009

Is the Stock Market Rally for Real? "Yes," says Richard Hoey of BNY Mellon & Dreyfus

posted July 28, 2009

The Future of the Dollar: Worth Less or Just Worthless?

posted April 6, 2009

The Bernanke Exit Strategy: Seven Stock Market and Economic Consequences

Thu, 27 Aug 2009 19:22:23 -0800

President Obama announced on August 25, 2009 that Federal Reserve Chairman Ben Bernanke would be reappointed to another four year term. Bernanke's appointment, which will likely be confirmed by the Senate, may impact the course of American economic development for many years to come.

Many observers have speculated on what form the Chairman's exit strategy from his policy of monetary ease will take - a policy that saved a select group of failing companies (and their employees' jobs) and potentially prevented a deeper collapse of the stock market and financial system.

Here are seven possible consequences of the Bernanke exit strategy:

The American stock market, after benefiting from the current high level of money creation, may suffer once the effects of potential Fed tightening tools (such as successive Federal Reserve discount rate increases) are felt. The discount rate is the interest rate at which banks may borrow funds directly from the Federal Reserve bank.

The U.S. dollar may continue its long term decline as foreign nations see in the Obama administration's "buy now, pay later" fiscal policies, an unwillingness to address our fundamental debt problems by cutting spending and paying down our public debt. These nations may simply lose confidence in the dollar.

Americans may perceive their currency to be unsafe should the long term decline of the dollar become unmanaged. Capital flows could accelerate out of the United States, possibly inciting government restrictions on capital flows by Americans (there is precedent for restrictions on capital flows in democracies, as was demonstrated after the rapid collapse of the Icelandic economy and currency in 2008).

Interest rates may rise as a consequence of the Federal Reserve removing the current policy of monetary ease, lowering the value of long term bonds and raising the cost of debt financing by the U.S. government.

The budget deficit may grow more than expected as a result of higher debt financing costs, possibly leading to future forced budget austerity by the Obama administration, or more likely, its successor administration.

Higher inflation may accompany loftier interest rates as both a longer term consequence of monetary ease (too much money creation) and the timing of Ben Bernanke's potential tightening strategy. Stocks may be a reasonable hedge against inflation as company profits may rise in nominal terms along with costs.

As a result of higher price levels, hedges against inflation such as oil, certain oil industry equities, physical gold and silver may polish off their ten year bull market.

Please see posts below for more information.

Is the Stock Market Rally for Real? "Yes," says Richard Hoey of BNY Mellon & Dreyfus

posted July 28, 2009

Protect Your Investment Portfolio from Inflation and Rising Interest Rates (and Ben Bernanke)

posted July 21, 2009

The Future of the Dollar: Worth Less or Just Worthless?

posted April 6, 2009

Warren Buffett and PIMCO Concur on the Potential Fate of the U.S. Dollar

Wed, 19 Aug 2009 19:21:57 -0800

Both Warren Buffett in his August 18, 2009 editorial in the New York Times and Curtis Mewbourne in an August 2009 report on investment manager PIMCO's website appear to concur on the fate of the U.S. dollar: that it may continue to fall. The dollar index (September 2009 contract) closed August 18 at 79.035.

Buffett points out that "the current account deficit - dollars that we force-feed to the rest of the world and that must be invested - will be $400 billion or so this year." He adds that there have recently been indications that foreign nations holding U.S. dollars have been investing in our companies, financial markets, and real estate in addition to U.S. Treasury instruments. According to Wikipedia, lenders from Japan and China own over 45% of U.S. foreign debt.

It is troubling that countries that already own much of U.S. debt instruments may turn to buying up real assets in our economy. This may be a short term fix to our current economic woes as foreign investors liquefy both healthy and troubled U.S. asset holders. Yet, these potential investments in quantity may cede even greater control of our economic destiny to the whims of nations and whose goals may not coincide with our government and citizens.

In his piece, Buffett quotes economist John Maynard Keynes, who wrote that through the tax of inflation governments can secretly confiscate much of the wealth of their citizens. The middle class can be economically damaged by an embedded inflation, as occurred during the late 1970's.

Indeed, Buffett has stated that inflation in the coming years could be greater than that of the 1970's. The annual inflation rate topped out in 1980 at 13.5%. If Buffett's prediction of higher price levels comes to pass, it may take a greater number of dollars to buy a can of Coca-Cola. The dollar may be worth-less.

Buffett concludes that the fate of the U.S. dollar lies with Congress.

Pimco's Curtis Mewbourne in an August 2009 report writes that we are witnessing "a loss of status for the U.S. dollar as a store of value" even while there may be no sole real alternative to the dollar as a reserve currency at this time. The U.S. dollar benefited during the financial crisis, but those capital flows have reversed to a degree, he reports.

Mewbourne states that emerging countries hold a large share of international reserves and that the dollar is likely to continue to decline, especially against emerging market currencies. Further, he writes that China may be transitioning from an export-led to a domestic demand driven economy. While China with its stimulus plan has been able to maintain GDP over 6%, India has kept GDP over 5% without such a plan, Mewbourne notes.

China and India have 30% of the world's people. China's car sales may soon eclipse U.S. car sales. In July, Bloomberg reported that Franklin Templeton's Mark Mobius stated the Chinese stock market capitalization may exceed U.S. capitalization within three years. However, this would include Chinese state-owned enterprises.

Mewbourne writes about the "New Normal," where highly indebted developed economies such as the U.S. experience potentially reduced growth rates. Accordingly, the emerging economies may experience less export demand from more levered developed countries, but they may have opportunity to grow their internal markets.

I believe that the "New Normal" economic order may bring investment opportunities. I have written in this blog commentary on the potential decline of the U.S. dollar (see related articles below).

I own in my portfolio investments which may benefit from a further decline of the dollar over time. These include the Franklin Templeton Hard Currency Fund, the Matthews Asia Pacific Fund, and other funds holding international equities. I also continue to own gold and silver, though I would look to unload partial positions should those markets take off.

Protect Your Investment Portfolio from Inflation and Rising Interest Rates (and Ben Bernanke)

posted July 21, 2009

The End of the Dollar as We Know It?

posted April 13, 2009

The Future of the Dollar: Worth Less or Just Worthless?

posted April 6, 2009

Economist Richard Hoey Sees Stock Market Climbing a Wall of Skepticism

Mon, 10 Aug 2009 14:05:59 -0800

BNY Mellon and Dreyfus Chief Economist, Richard Hoey, elaborated on the potential for a continuing bull market in stocks (though not without corrections) in an August 7, 2009 interview on CNBC. The Dow Jones industrial Average closed at 9370.07 on that date.

Hoey stated "we are at a particular cyclical moment." Further, he said that the global recession is over and that the leading economic indicators for every major country in the world are rising. "We are going to have rising real GNP for practically every significant country in the world in the third quarter," Hoey stated.

Hoey also said, "I have been here before. We had two severe recessions, one in 1974-75 one in 1981-82. At the bottom of the recession when everybody was so pessimistic as the recession was anticipated to end... the credit crisis eased up, you made a bottom in the stock market and you just rose against this tremendous wave of skepticism... It was a great opportunity after a bad period of performance in stocks, and this feels exactly the same way. The recession bottom was probably June or July. I don't think you ever may lose big money in the stock market buying it at the recession trough."

Hoey's argument has some appeal. There is nothing better to the long stock market investor than a market climbing a Wall of Worry as many investors fear to step in because of a precarious economic situation. They may be caught underinvested or just may never get in.

This stock market rally may be similar to the ascent out of the 1973-74 bear market, which occurred during a decade of generally rising gold and oil prices and a final culmination of these prices in 1980. As I have mentioned repeatedly in my blog, inflation sensitive equities did well in the late 1970's, punctuated by the stock market "October massacres" in 1978 and 1979 when the market fell 11% and 10%, respectively.

However, I would caution investors that fundamentally, our budget deficit, our accumulated public debt, and current account deficit are much worse now than in the earlier bear market periods to which Richard Hoey refers. We are the world's largest debtor nation. Also, the Obama administration is now trying to pass an extremely expensive and hastily considered overhaul of our healthcare system that, if signed, may place much greater strain on our small businesses and country's financial position.

But this does not mean that our stock market cannot go up strongly.

I currently own oil and oil service stocks, physical gold and silver, and agricultural and natural gas ETFs. I also own equities and mutual funds whose prices would not necessarily go up in an inflationary economy.

Is the Stock Market Rally for Real? "Yes," says Richard Hoey of BNY Mellon & Dreyfus

posted July 28, 2009

Will This Stock Market Go Lower?

posted March 17, 2009

Would You Rather Be a Trader or an Investor?

posted February 23, 2009

Why Long Term Investing in the Stock Market is not Dead

posted December 8, 2008

Is the Stock Market Rally for Real? "Yes," says Richard Hoey of BNY Mellon & Dreyfus

Tue, 28 Jul 2009 14:52:16 -0800

Economist Richard Hoey of BNY Mellon & Dreyfus is a veteran forecaster with many prescient calls to his credit. In an interview on July 27th on CNBC, Hoey stated that "the evidence is now clear cut" that the Fed has done enough to stabilize the financial system. He further stated that a "classic recession bottom" is in place and he expects 3 to 3 ½% economic growth in 2010.

Hoey states that "massive inventory liquidation" took place during the 2nd quarter and that auto and housing weakness was so profound that there will be no more exhaustion. He notes that Chrysler has shut down all its plants in America (a sign of the times...) and that you cannot exhaust something further that is not there. Hoey sees the roughly 20% of consumers who still have assets left carrying the weight for his projected economic turnaround.

For stock market punters, Hoey states that "we have a substantial bull market in the stock market" and that this is occurring "in a sustainable economic expansion." He points out that in the last long term bull market that began in the 1980's, we had a double dip recession because Fed Chairman Paul Volker ratcheted up interest rates to 21% to stop inflation, something Ben Bernanke is not currently doing.

I would add that the inflation of the 1970's was likely caused by the Fed's excessive money creation, which many observers agree is happening again under Bernanke. Yes, Fed policies in the early 1980's and 2009 are different, but the Fed's current policy of effectively debasing the dollar to "ensure" recovery may lead to much higher prices and interest rates in future years. At that point in the future, Fed policy may need to be tightened, which could result in another stock market downturn and another recession.

It appears that the stock market retrenchment we witnessed from September 2008 to March 2009 is similar in severity to the 48% stock bear market seen in 1973-74. I am convinced that if Bernanke did not and was not continuing to pour money into the financial system, the damage today to the stock market would have been much worse than 1974. However, this Fed policy, including sustaining Japanese style "zombie banks" and companies, may be merely postponing our ability to recover in a dynamic way economically by many years.

We may have seen the stock market low for the bear market in March 2009 at Dow 6469.95. This assumes, though, that Bernanke can succeed in getting the economy going without excess inflation and the Obama administration can rein in spending (something that the administration did not appear to be concerned with until the recent blue dog Democratic challenge to the Obama healthcare plan). These are challenges for the stock market, though technically it appears to have room to continue upward.

We will have to observe Bernanke's future exit strategy to get us out of the mess that we are in to determine the longer term direction of the stock market and the power of future inflationary forces.

In my December 8th 2008 article, "Why Long Term Investing is Not Dead" (see related posts below), I noted that one could consider holding stocks as portion of one's portfolio even during a bear market. I further outlined some of my positions at that time and made the case that asset diversification can help mitigate the effects of a severe downturn in stocks.

However life-altering the stock market Crash of 2008-09 has been, it does have precedent in financial history. The American stock market and economy have always recovered in the past, though poor policy choices on the part of our leaders can extend the time for that recovery considerably.

Will This Stock Market Go Lower?

posted March 17, 2009

Would You Rather Be a Trader or an Investor?

posted February 23, 2009

Why Long Term Investing in the Stock Market is not Dead

posted December 8, 2008

Stock Market Investing and the Power of Contrary Opinion

posted March 22, 2007

Protect Your Investment Portfolio from Inflation and Rising Interest Rates (and Ben Bernanke)

Tue, 21 Jul 2009 13:42:25 -0800

Readers of my blog may know that I anticipate rising price levels and higher interest rates in 2010 and beyond. Bear in mind that it takes time, sometimes years, for a strong inflation to embed itself in the economy. I want to talk about ways to protect your portfolio from rising prices and interest rates, but first a bit of history:

While President Nixon was in office, Fed Chairman Arthur Burns responded to pressure from the White House eager to have a strong economy when Presidential ballots were cast in 1972. Burns expanded the money supply to help ensure a growing economy in time for Nixon's reelection. Inflation soared to 12% by 1974. The oil shock in 1973 compounded the economic and inflation situation. The stock market lost almost half its value, and inflation hedge investments such as gold and silver plummeted from their highs when the economy dove into a deep recession in 1973-74. In this case, political expediency led to easy monetary policies and extremely high inflation.

In early 1978, Federal Reserve Chairman G. William Miller inherited an economy with inflation under 7%. Miller did not curtail his expansionary monetary policy as he believed that market forces could diminish a rising price level caused by easy monetary policy. He continued to prime the pump. The second oil shock hit in 1979-80. Oil hit $40 per barrel and gold soared to $850 per troy ounce in 1980. Inflation and interest rates rose to double digits. The economy was a mess and Jimmy Carter was voted out of office.

One can draw lessons from history about how to position one's portfolio to rise along with a potential future inflation and higher interest rate level. Fed Chairman Ben Bernanke may indeed be able to engineer a successful unwinding of his policy of monetary ease, but there is no guarantee. According to Mr. Bernanke in his July 20th Wall Street Journal article, there are various tools available to the Fed which could accomplish the unwinding, but Bernanke has also stated that Fed policy may be accommodative for some time .

I believe that a continuation of expansionary monetary policy may be beneficial to investments such as gold and silver in the coming few years , just as it has been in the past. We already have buoyant gold and silver prices, though their bull market is showing signs of age (gold is currented at $949 per troy ounce and silver is at $13.55 per ounce). I believe that the unprecedented nature of the Fed's "rescue" of the economy may augur for an extension of the bull market in gold and silver, though their short term direction appears less clear to me. The oil market may be buoyed by a favorable long term supply decline as well.

I am positioning my portfolio in the following ways:

I own physical gold and silver, looking to unload the metals in stages should a bubble appear in these markets in the next few years or sooner.

I own natural gas and agricultural stock ETF's to potentially benefit from commodity price inflation in these areas and a stock market favoring these sectors (the prices of these commodities are sharply down from their climax highs in 2008).

I own multinational integrated oil company and oil service stocks to benefit from potential oil price increases and a possible return to an inflation hedge friendly stock market such as we experienced in 1979-80 and during the commodity price bull market from 1999-2008 (the 1979-80 bull run in oil and oil service stocks was punctuated by sharp declines, one of which was called the "October massacre.")

I continue to own shares in the Franklin Templeton Hard Currency Fund which can invest in the currencies of countries with low inflation and which may benefit from a falling U.S. dollar.

I own various other diversified equities and mutual funds to "hedge" my portfolio should my outlook on inflation be wrong.

I own my own residence and have a fixed rate mortgage. My residence is not underwater.

If prices of the daily staples I buy rise at a faster clip, I plan to stock up on them to beat the next price increase.

Inflation, by definition, erodes the purchasing power of our dollars. In the past, an overly expansionist Fed policy has led to a higher price level and rising prices for inflation hedges. The Fed accommodation that we see today may lead to a future price level bubble and a bubble in inflation hedges.

If a bubble develops in these sorts of investments, then their elevated price levels may eventually pop, just as the stock market bubble popped in 2000 and the real estate bubble began to deflate in 2007. Tight monetary policy may then be needed to contain a potentially powerful inflation.

But until then...

Why I Sold Part of My Gold Position after a Six Year Hold

posted June 23, 2009

Inflation Hedge Strategies and Thoughts for 2010 and Beyond

posted June 2, 2009

Silver Market May be Embarking on Important Price Rally

posted May 30, 2009

Gold Market Strategy: An Upward Price Acceleration May be Imminent

posted March 23, 2009

U.S. Economic Future: May We Lose Complete Control over our Destiny?

Fri, 10 Jul 2009 18:33:46 -0800

See specific gold and silver strategies

Could it be possible to think in our current economic times that America may lose complete control over its own economic future? Has an economic and financial process begun that may not easily be undone that could threaten the very core of what is left of our economic, financial and social well-being?

I believe one big problem lies with the pyramiding of debt over decades by our elected officials: the rapid expansion of the United States public debt and our country's expanding yearly budget deficits. The national debt is now $11 trillion. Wikipedia states that under the 2010 Obama budget projections, the debt is projected to reach $20 trillion by 2015, but is expected to increase to nearly 100% of GDP by 2010 and remain at that level. Vice President Joe Biden has now admitted to miscalculating the "strength" of the potential recovery. All bets are off. And that is what I believe the Obama stimulus plan(s) are doing: adding to our debt and betting our future on failing companies and industries.

The federal debt explosion may lead in time to more severe consequences for the dollar (the dollar index is currently at 80.05). Our dollar is debased by excessive Federal Reserve money creation which eventually causes inflation. A sharp upward revaluation of gold and silver, food prices and medicine may accelerate once the economy responds to the printing of money out of thin air and debt monetization. Can you imagine paying $10 for a gallon of gas? When I was a child, my father complained about 29 cent-a-gallon gas! The oil companies do not have the license to print money. The government does!

We did not vote out of office the many legislators (both Republicans and Democrats), who voted for toxic spending programs over the years, even while those programs were effectively maxing out our country's credit cards. Many programs created in the Great Depression of the 1930's are still on the books, long after the recovery from that prolonged slump. The depth and suffering of the people in the Great Depression is general knowledge. But that terrible time's economic and social duress may have been prolonged for years because of the very programs which were intended to cure it!

The depression of 1921 may be highly instructive to our current predicament. It is only being explored in greater detail now because it was over so quickly! This was a dramatic deflationary slump which was quite severe. The Wikipedia Free Encyclopedia states that the fall in the GNP price deflator from 1920 to 1921 was the largest one-year percentage decline in over 120 years. This is greater than the Great Depression of the 1930's!

Wikipedia further states that a robust recovery followed the deep deflation of 1920-1921. In the 22 months after the economy bottomed, industrial production rose over 60%, the money stock expanded by double digits, and wholesale prices rose by 9%. Net national product rose over 20% in the corresponding two calendar years.

The economy's sharp recovery has been attributed by some economists to President Harding's non-interventionist economic policy and fiscal restraint (he sharply downsized federal spending). This is the exact opposite of what is being done today under President Barack Obama and what was done under both Bushes. The Federal Reserve did not become active in open market operations until after the 1921 recovery, so the Federal Reserve did not play a part in this remarkable recovery. Again, Federal Reserve intervention on a large scale (such as we have seen under Alan Greenspan and Ben Bernanke) did not play a part in the splendid economic recovery seen after 1921).

This episode is a wonderful example of the success of Joseph Schumpeter's "creative destruction," where in an economic downturn the declining businesses simply fail and economic resources are reallocated to successful businesses so that the winners get the economy going again. This is certainly a better alternative than having our economy possibly go through a prolonged depression.

George Soros, now re-retired from managing his hedge fund enterprise, stated in an interview on Chinese television that the cost of creative destruction has been too too great. Soros mentioned that he had had a dinner engagement with Alan Greenspan, a believer in Schumpeter's theory. During the dinner, Greenspan recanted his belief in the theory, indicating that this time the cost had been too great. Soros stated in the Chinese television interview that the failure of Lehman Brothers was a "game changing event," and it was the time for the Federal Reserve and the regulators to step in to stop the carnage.

It may have turned out better if our leaders simply let the losers take their losses and not have the government simply print money with less and less value to pay our bills and to "stimulate" losing industries. We could have avoided spending hundreds of billions on bailing out AIG and other firms (AIG's chairman was reported to have said that maybe the company should have been allowed to fail). Our economy may have righted itself in a shorter time. Are we really economically better off now for all the bailouts? Let's just take our medicine and be done with it so we can move on and recover just as the economy did after the 1920-21 depression.

Warren Buffett, on the other hand, believes that Bernanke has been doing a good job in his intervention in the economy. It is conceivable to me that if many major institutions had been allowed to fail, the Dow Jones average may have fallen a great deal further than 6469.95, the low it hit in March 2009, but there may have been an accelerated stock market and economic recovery out of the abysses once economic resources were reallocated to winning businesses and the federal government was perceived worldwide to be solvent. Instead we are now rewarding the losers with huge amounts of money and many nations with large pools of dollars are looking for an exit strategy to get rid of their dollar reserves. This potentially puts our society's economic and social fabric at risk.

I believe that Americans were in denial regarding the consequences of buying houses with no-money down. Indeed, many banks were overly aggressive in offering no-documentation loans. Wall Street was complicit in securitizing those mortgages, "taking away" the risk from mortgages which had faint hope of being repaid. It is true that many on Wall Street attempted to reduce their risk exposure through complex, privately-traded derivatives which blew up when the subprime crisis hit. These bets exploded in a very nasty way, as we all know today.

We may be facing significantly higher inflation rates than we would like to admit in the future if we do not elect leaders who will not squander our nation's resources. During the latter part of the 1970's, inflation rapidly accelerated into double digits and interest rates soared to 21%. I recall at the time walking into a major New York City bank and being offered a 19% return on one year commercial paper. The banker, who sat behind a spacious desk with no personal computer (they weren't around then!), told me that the bank would not offer longer terms than one year on such an investment. That may be true of commercial paper, but in the 1970's, 30-year triple A rated United States Treasury bonds lost almost half their par value of 100 as interest rates soared skyward. That could happen again, or worse.

We are now monetizing debt in a manner similar to what led to the great inflation of the 1970's. The difference is that at that time we were the largest creditor nation on earth. Now we are the world's largest debtor. The well has run dry. We may be in for tough times ahead if we do not elect leaders who will responsibly take care of taxpayer money. Ron Paul has said he does not want to interfere with the Federal Reserve operations. He just wants to know what they are doing.

Paul Volker was appointed as Federal Reserve Chairman in 1979 to stop the inflationary economic mess, and fortunately, he succeeded by tightening the money supply. Though this led to a very deep recession, it cleansed high inflation from the economic system. The economy proceeded to have almost twenty years of non-inflationary growth. It would be very surprising if he could return to the position when Bernanke's term expires in January 2010.

The 1980's-1990's expansion was interrupted by the 1987 stock market crash (which was in the context of a long term bull market in stocks), and a banking and real estate depression in the early 1990's where many bank shares were available at bargain prices. Such bank shares such as Wells Fargo in 1992 and others multiplied in value many times during the 1990's. The difference between now and the prior 1982-2000 equities bull market is that we appear to still remain in a secular bear market, though inflation hedges may outperform in the coming years.

I will not speculate on the short term direction of the gold and silver markets, but the fundamentals at this time appear to make a strong foundation for higher prices over the next few years. The 1970's gold and silver bull market lasted ten years with a sharp drop in gold and silver prices at mid decade. This mid-decade correction in the metals complex coincided with a severe bear market in equities in 1973-74. However, the stock market did bounce back, and the metals and oil prices surged for the remainder of that inflationary decade.

The current gold and silver bull market that began in 1999 is approaching the duration of the 1970's bull market. No one can know for certain whether the buoyancy in gold and silver prices will accelerate and continue beyond the ten year term of the 1970's bull run. No one knows for certain whether the gold market price (currently at $913 per troy ounce) may hold in this range or decline before a potential price expansion. But as I see it, the fundamentals of the gold and silver markets appear to support an extension of their ten year bull market. Again, fundamentals can change and technical support levels are regularly violated in all types of markets. But under the scenario that I foresee, conditions appear to support further price expansion.

Our economy may be experiencing the beginning of a powerful monetary inflation in the midst of the morass in which we find ourselves. This may take time to develop. Indeed, it is possible for an economy to experience recession and monetary inflation at the same time. Once inflation starts, it is difficult to stop.

Ownership of physical gold and/or silver may be an excellent investment strategy to hedge one's portfolio against the potential for future inflation and economic disruption. Yet, Americans may still have time to mitigate the situation. If enough people demand that our elected officials rein in unnecessary spending and bailouts, we may recapture our economic future. If President Obama appoints a Federal Reserve Chairman in January 2010 who would strive to maintain the integrity of our money, then we may have a better chance at securing our economic destiny. We may need to uproot some of President Obama's "change" to secure our economic security.

I have further rebalanced my portfolio by selling gold bars, though I still retain gold bar and silver bullion positions. I have added agricultural, silver and natural gas ETF's to my portfolio. I continue to own shares in major integrated oil companies, a major oil service firm and a gas pipeline company. Other positions include various common stocks, mutual funds containing various domestic and foreign equities and the Franklin Templeton Hard Currency Fund.

Related posts:

Inflation Hedge Strategies and Thoughts for 2010 and Beyond

posted June 2, 2009

The Future of the Dollar: Worth Less or Just Worthless?

posted April 6, 2009

How to Invest in Barack Obama's "Workers Paradise"

posted March 13, 2009

Why the Gold Bull Market May Begin its Last Leg Sooner Than You Think

posted February 23, 2009

Why I Sold Part of My Gold Position after a Six Year Hold

Tue, 23 Jun 2009 22:10:16 -0800

I bought gold bars and coins in 2003 at $354, $377 and $383.50 per troy ounce, and in 2004 at $431 per troy ounce. I purchased gold coins in 2009 at $1000 per ounce. I also purchased silver bullion this year.

I am continually reevaluating my gold and silver positions to account for changes in the market. The gold market, as I stated in my previous blog entry (see related posts below), emerged from a large flag formation on the weekly chart when the gold price on the August 2009 contract rose from $900 in January of 2009 to a high of $1006 the following month and then retreated. It has since made another run at the February high which is unsuccessful as of this writing (that may change).

In my article posted in October 2007, when the gold price was trading at $753 per ounce, I concluded that there were three possible scenarios for the future of the gold price:

The first scenario was that following the surge in the gold price in 2007, the gold market had potentially reached its peak, or the eventual high might be around the 1980 peak area of $850 per ounce. After that peak, excitement in the metal could stall and the gold price might then retrace its steps. I assigned a lesser probability to this outcome, and so I maintained my gold positions.

The second scenario posited that the gold price would challenge the 1980 high of $850 and then would temporarily retreat while testing the $850 area multiple times before pushing through it on the upside to new high territory. I assigned a greater probability at the time of the article to this scenario. This in fact has occurred, and the gold market rose to new all time highs.

The third scenario rested on looking at the performance of the gold price during the 1970's when there was a ten year bull market in gold (gold went from $35 in 1971 to $850 in 1980 during a period of high inflation). This rise was punctuated in 1973-1974 by a deep recession when both gold and the stock market lost half their value. Gold later recovered spectacularly in the late 1970's as gold, gold stocks, oil, and oil service stocks performed very well. If this were to happen now, gold could potentially rise significantly higher than the $753 per ounce at the time of the 2007 article. At the time of my 2007 article, I assigned a greater probability of the second or third scenario occurring.

The 1970's bull market in commodities lasted ten years. The current bull market in commodities which began in 1999 is now of similar length. Thus, I would expect a potential blow-off peak in gold sooner rather than later. The gold price may break out of its $1006 high and move boldly into new high ground, taking silver along for the ride. If this is true, the question is how high will the price go? I answer that no one really knows for certain.

But is there a possibility that the gold rally could stall out around the current level of $924 or even at $1100 or $1200 per ounce should it break out of its current range? I refer to the very wise words of the late Sir John Templeton from a January 2005 interview when he foresaw the end of the housing bubble. During the interview, he stated there were almost no equities bargains worldwide, and that the gold bull market was more than half over (the gold price was around $400 at the time of the interview). He had been quoted to have said, "bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

Could a potential blow-off top in the gold and silver markets represent the euphoria into which savvy metals holders could sell? Sir John Templeton was by some accounts the greatest investor of the 20th century, and so I take his insights to heart.

Yet, the fundamentals of the gold market still appear to be extremely healthy. The ever growing budget deficit of $1.8 trillion and escalating public debt threaten to further unravel our financial system. There has been near systemic economic collapse in our financial system, at which the authorities are throwing money. As most observers can see, the Obama administration is spending with only symbolic fiscal restraint (betting the farm!) and may not be able to take back that money without sizeable tax increases.

As I see it, the problem with gold now is that it is too well known and popular as an investment. It appears that we are in the optimistic stage. That does not mean that gold does not have further to move upward. But it is not the bargain that it was when I bought it six years ago.

The hard money advocates (including this writer) have been pounding the table on the metal for years. And fundamentally, the economic situation may be extremely constructive for gold. If the gold price breaks into new high ground, there may be nothing stopping it from repeating what happened in 1978-1980 (the gold price jumped fourfold).

But there is no guarantee. I attempt to practice diversification in my portfolio. As I already hold many inflation hedge investments, I have reduced my gold position to rebalance my portfolio. I am placing the funds received from the sale of part of my gold position into a money market fund until I decide where to invest it. I continue to hold silver bullion and the remainder of my gold.

Related posts:

Gold Price Shines and Takes a Breather: Is There More Upside to Come?

posted March 3, 2009

Why Our Economy Will Not Prosper Until We Have Hard Money and How You Can Profit From It

posted January 13, 2009

Stocks, Gold, Oil, the Dollar, and Inflation: A Potpourri in the Current "Unwinding of Debt" Crisis

posted September 16, 2008

Bulletin: October 24, 2007 - What Now on Gold?

posted October 24, 2007

Inflation Hedge Strategies and Thoughts for 2010 and Beyond

Tue, 02 Jun 2009 11:58:12 -0800

See specific inflation hedge strategies

It is widely known that government authorities across the globe are attempting to pump prime their nations' depression-racked economies by printing vast sums of paper money. Some nations, including the United States, are running trillion dollar deficits and will go deeper into debt in future years in order to finance an expansion that may not materialize as planned.

If we reach that point where the pump priming from the Fed and the fiscal excess of the government fail to keep the economic shell game going, the financial markets may lose greater confidence in our dollar (the dollar index is currently at 79.19 on June 1, 2009), Treasury bonds and stock market {Dow Futures at 8688 {(though the stock market may move higher as it has exceeded its 200 day moving average: a widely watched indicator)}.

In this scenario, the federal government might potentially lose what limited influence it currently has over the future of our economy. I wrote about the possibility of this loss of confidence before the U.S. Presidential election in an earlier article on the potential effects of an Obama administration on our financial markets (see related articles below).

But the government appears to have a plan to get us out of this mess. By printing money at an unprecedented rate and increasing public indebtedness, our leaders may believe our economy might be lifted. At that point, the Federal Reserve could withdraw its monetary ease once the recovery seems solid, giving us an economic recovery without great inflation.

I have written consistently over the last two years that I thought we may be in store for a 1970's double digit inflation and stock market decline. Even the oracle of Omaha, Warren Buffett, an Obama supporter, stated in a recent interview on a major financial news network that we could experience in the coming years a wave of price inflation that could match the 1970's embedded inflation. Or, he stated, it could be much worse.

If the Treasury runs out of fiscal ammunition and the Federal Reserve cannot give up on monetary ease because of the state of the economy, then I agree that the inflation could be much worse.

How can one protect one's portfolio and family from the potential ravages of a great inflation? I saw years ago that our commodity bull market had begun in 1999. Inflation and the oil and gold markets were rising and I looked back to the 1970's stagflation era for lessons that I could use from that time to benefit from those trends.

At that time, gold and silver rose powerfully (gold ran from $35 per troy ounce in 1971 to $850 in 1980 and silver ran from $2 In 1973 to $49 in 1980), oil and oil service companies soared (oil surged from $3.50 per barrel in 1970 to $40 per barrel in 1980), interest rates soared to double digits as many long term bonds lost half their value, and the Swiss franc was highly regarded as a hard money investment against a falling dollar. Were it not for the monetary discipline of Fed Chairman Paul Volker in the early 1980's, we might have entered hyperinflation at that time. We may need Paul Volker's monetary discipline again.

Gold and silver may be poised to accelerate their rallies (gold is currently priced at $977.90 per troy ounce and silver at $15.60). There has been a great deal of discussion that potential IMF gold sales could harm the gold market, but I believe that if the sale goes through and there is a negative effect on the market, the decline would (i) likely be temporary, and (ii) represent a potential buying opportunity. I have owned gold coins and bars for over five years, which generally act as inflation hedges in the event of sharply rising consumer prices. I have invested in silver bullion in the last two weeks.

The price of oil has rallied from below $40 to over $68 per barrel. It may continue its rise to the $80 per barrel range. I am holding my investments in major multinational oil firms and established oil service companies.

The September 2009 30-Year T-Bond futures lost more than three points on June 1st, settling at 114.18. It appears to be entering an area of price support on the weekly and monthly charts with many market participants expecting increasing inflation down the road. There has been a five month sell-off in long term bonds, which inversely means interest rates are going up.

I missed my chance to refinance my mortgage, but I think keeping a fixed rate mortgage with a stable payment is best if you can do it. I am avoiding long bonds, and I have sold my mutual funds that had greater exposure to longer maturities.

There is now much justified concern about the fate of the U.S. dollar, which is under pressure due to our government's decades of borrowing overseas to finance our citizens' consumption and the severity of our economic crisis. Many participants are worried that we are at an inflection point: that the dollar may go into freefall. I have heard one commentator who has stated his view that there may be a managed decline of the dollar. In a previous article, I have stated my opinion on the monthly U.S. dollar index chart. In 2007, we fell through a twenty year shelf of support at approximately 80 on the dollar index. In late 2008 and into 2009, we rallied back into that previous support area and have in May 2009 resumed the decline.

I continue to hold the Franklin Templeton Hard Currency Fund and for now the CurrencyShares Japanese Yen Trust to maintain asset diversification. Both potentially benefit from a falling dollar. I also own mutual funds which invest in foreign stocks.

In the resolution of today's crisis, Americans ought to come together to solve our problems as a people without great discord while protecting our government's ability to continue without running out of viable fiscal options.

Regarding our personal welfare, what can we learn from the actions of families weathering the inflationary economy of the 1970's? In the late 1970's, hard money newsletters were in the mainstream. Many households were buying gold, silver and even diamonds as hedges against inflation. Some citizens stocked up on canned goods and prepared to survive for the worst of times. Others rushed to buy goods to beat anticipated price increases.

Prices were indeed rising in the late 1970's, but famed commentator and investor Jim Rogers has stated recently that he expects food shortages in a few years with sharply rising prices for food. He states that presently farmers cannot get loans for fertilizer and equipment because of the credit squeeze. Consequently, he says that less food may be produced and there may be shortages in the future.

I would like to draw attention to the fact that commodities are notoriously volatile and can be known to turn on a dime. I will say that as long as our government can afford to continue its farm loan programs, then our farmers may be more insulated than elsewhere, but you may draw your own conclusion on that. Rogers is recommending, among other investments, an agricultural index.

All of us may be hurt to some degree by an embedded inflation, and many families may be hurt dramatically by such an event. In this environment, perhaps the best one can do is to hedge one's bets and plan for the possibility of future inflation. Should it come to pass, one may be more prepared to protect one's family and one's portfolio.

Silver Market may be Embarking on Important Price Rally

posted May 30, 2009

The End of the Dollar as We Know It?

posted April 13, 2009

Why Gold May Begin the Last Leg of its Bull Market Sooner than You Think

posted February 23, 2009

How Obama May Bomb the Stock Market and the Economy in 2009-2010

posted June 19, 2008

Silver Market May be Embarking on Important Price Rally

Sat, 30 May 2009 13:00:15 -0800

The silver market appears to have broken upward through important resistance at $15 per ounce on the weekly and monthly charts, closing at $15.73 per troy ounce for the trading month of May 2009. On both charts, it appears silver could reach as high as the $17-$20 range, with a potential blow-off top potentially reaching the old 1980 high range at $32-$42 per ounce. This may occur in the next one to two years, perhaps much sooner.

The use of price charts and similar analysis has key limitations, and no one can predict with accuracy short-term price movements. Nonetheless, the possibilities here are interesting.

Selected monthly silver futures rose over 2000% from $2 per troy ounce in 1973 to over $40 in 1980 as the Hunt brothers tried to corner the silver market at that time. We may see the silver market rise from $4 at its recent low in 2001, to up to one half that 1970's twentyfold percentage increase, to as high as $32 -$40 per troy ounce in the next year or two, or much sooner. This silver bull market might be of similar duration as the 1970's bull market, lasting from 2001 to 2009-2010.

It may be important that the silver price has closed near its high for the month of May on the monthly chart at $15.73. This has occurred as the silver price has broken through monthly chart resistance at the $15 level. As I have said, there appears to be little immediate resistance until the $17-$20 range. We may continue this upside push as the action on the monthly chart appears to show.

This portrait of the silver market concurs with my previous reiteration of the gold market dynamics (see related articles below), where I state that we may now be in the final upward acceleration phase of the gold market. In gold's earlier long term bull market lasting nine years, the gold price rose from $35 to $850 per ounce between 1971- 1980.

In the last two years of that gold bull move (1978-1980), gold multiplied from $200 to $850 per ounce in an explosive fourfold move. Silver traded at a reaction low of approximately $8 in October 2008. A fourfold increase in silver from that low might produce a potential bull market top in the $32 per troy ounce range in the near future.

Some fundamental economic and financial market factors may also be supporting the bullish push in silver. The U.S. dollar is declining sharply as I have written about repeatedly in my blog and articles. If the dollar continues downward as I expect, silver may increase in value as a harder money investment.

The Swiss franc, a traditional hard money currency, is nearing the top of an extended flag pattern on the weekly and monthly charts. A breakout here could potentially drive that currency much higher. The metals could also move upward further in this scenario.

Also, Bernanke's monetary ease may not be able to be easily reversed, perhaps adding further impetus to the metals complex and to the potential profitability of inflation hedges in general.

I have sold my remaining position in the Templeton Global Bond Fund while still holding my shares of the Franklin Templeton Hard Currency Fund. I have purchased silver bullion in the past week and continue to hold gold. I am looking for a bubble in the gold and silver markets to unload partial or full positions.

Silver Rally: Is It Ready for Primetime?

posted September 25, 2009

Why I Sold Part of My Gold Position after a Six Year Hold

posted June 23, 2009

Protect Your Investment Portfolio from Inflation and Rising Interest Rates (and Ben Bernanke)

posted July 21, 2009

Obama and Bernanke May Destroy the U.S. Dollar to Repay National and Foreign Debt

Fri, 22 May 2009 16:30:59 -0800

As the dollar begins to cascade down once again with the dollar index at 81.64, many market participants, including this writer, are coming to the conclusion that America's domestic and foreign debts will be repaid with dollars that are worth much less. Many participants agree that the U.S. Treasury bonds that we and other nations hold will end up being worth less in real terms (i.e., will be able to buy fewer goods and services), and perhaps a great deal less in future years.

That may be the greater fear of our foreign debt holders. Remember, in the last great inflation of the 1970's, many long term bonds lost half their value as interest rates soared into the high double digits.

The authorities are depreciating our money, which in turn may allow us to better service our national and foreign debt. Government is accomplishing this by effectively placing half of its living expenses on the credit card.

Warren Buffett in an interview with a CNBC anchor at the height of the credit crisis, noted that the future should bring higher inflation, perhaps greater inflation than the 1970's, and that fixed income investments will not keep pace with an embedded great inflation. However, Buffett also stated that individuals with skills to sell should be able to buy a can of Coca-Cola with an equivalent amount of their labor in the future as they do now. Buffett is confident that owning good American businesses will be profitable over the long run. He is not selling America short.

Jim Rogers[, a well-known investor and commentator,] has expressed his view that the stock market should turn down from its current level (the Dow Futures closed at 8295 on 5/21/09). He argues that the Federal Reserve has shown the financial markets a good time (temporary in nature) by printing trillions of dollars in an effort to stave off a U.S. economic collapse.

Rogers claims that he is not buying any stocks now, but that he is buying gold and silver. He believes that most currencies worldwide will experience depreciation in the future, but he thinks that the Chinese yuan will emerge over time as the next reserve currency.

No one can predict the future, but I am personally betting on a decline in the dollar, and have redeemed a significant portion of my investment in the Franklin Templeton Global Bond Fund (a fund which holds U.S. and foreign currency denominated long and shorter term debt obligations). In my view, future inflation and possibly much higher interest rates may deeply discount this asset. Higher worldwide inflation and interest rates should hurt most fixed income debt in almost all currencies.

I have owned physical gold [for a number of years], and have recently taken a position in silver bullion as well. I am anticipating an upward resolution to a potential bubble in the gold and silver market in the next two to three years, possibly sooner.

The End of the Dollar as We Know It?

posted April 13, 2009

The Future of the Dollar: Worth Less or Just Worthless?

posted April 6, 2009

Stocks, Gold, Oil, the Dollar and Inflation: A Potpourri in the Current "Unwinding of Debt" Crisis

posted September 16, 2008

The Ownership Society: Worthy Concept, Poor Execution

Sat, 09 May 2009 00:04:59 -0800

I am not a great believer in the governing abilities of our former President, George W. Bush, but I do think his concept of having wide swaths of Americans participate in an ownership society was a laudable goal. The concept included large numbers of Americans riding a wave of prosperity engendered through ownership in appreciating assets such as homes, businesses and retirement accounts. This was viewed as a ticket toward upward mobility. At least that was the theory.

The ownership society might have succeeded if human greed had not intervened. And maybe it will always be that way. Greed certainly took over as the managers, the caretakers of our stock market wealth, often leveraged their (and therefore our) investments in what turned out to be little more than a (not-so-well) calculated gamble. When assets prices eventually fell as the hoped for economic society unwound, and leverage backfired, their investors lost agonizing amounts of money.

And on the opposing side of human nature, fear may cause our leaders to overcompensate in order to resolve serious economic crisis, causing future problems. For example, after the stock market bubble burst in March 2000, Alan Greenspan brought interest rates down to one percent by 2003. By doing so, Greenspan probably laid the foundation for the following asset bubble: the unprecedented appreciation of home values that persisted until late 2007.

Current Fed Chairman Ben Bernanke, in the framework of his study of the 1930's deflation, may be similarly laying the groundwork now for the next bubble: a great inflation in the coming years. The Fed's theoretically infinite balance sheet stands at two trillion dollars as part of an effort to avoid the worst case scenario of another Great Depression. Bernanke apparently intends to contain future inflation. We shall see.

The credit and general economic crisis we experience now is related to the failure of the ownership society. Instead of sharply increasing the home ownership rate (also a goal of the Clinton administration), many homeowners found themselves "under water" and have been forced out of their homes due to a collapse of the great housing bubble. Some innocent homeowners were simply taken in by banks and mortgage companies who sold mortgages with indefensible terms of payment. Others were hoping for a free lunch.

Investors whose dream may have been to parlay their wealth by reselling homes at ever increasing prices may have been impaled as the bubble burst. Wall Street securitized residential mortgages, packaging riskier subprime loans with higher grade mortgages in order to gain the coveted triple A rating from the ratings agencies. And it worked, for a while, until the housing market did not grow to the sky, as predicted.

Many citizens, investors, institutions and countries across the globe were hobbled by losses as a result of this failure. I hope that the lesson will be learned that fear and greed in human nature cannot be underestimated and that democratic societies may be vulnerable to similar crises in the future. Building an ownership society still remains a lofty goal, at least in my opinion. It is my hope that we can move out of this crisis without turning away from the strengths of our economic system that have sustained America for so long.

How to Invest in Barack Obama's "Workers Paradise"

posted March 13, 2009

Hedge Funds: Four Reasons Why You Should Not Invest in Them

posted March 15, 2007

Hedge Funds, Deriviatives, Debt, China, and the Risk of Systemic Market Panic

posted February 28, 2007