Recap of 2010 and 2011
While some well known trend forecasters like Gerald Celente were predicting a crash in 2010, I was taking the opposite side saying that “I don’t see it happening as quickly as Celente does.” In September of 2010 I cautioned traders in gold and silver mining stocks to think about taking profit. The HUI at that time was trading around 525 and today, 15 months later, it is trading at 516. I also at that time said the “ProShares UltraShort 20+ Year Treasury (TBT) is in uncharted territory. What this shows is that people still have faith in treasuries. In fact, what we are seeing is the perceived safety in treasuries as the deflationary credit contraction continues.” This concurs with what I wrote about in Chapter 4 of my book, “Buy Gold and Silver Safely” and how we were in the midst of an overall deflationary credit contraction. Today, TBT is trading right at 18.45 and within the next year will be a great long term buy.
We did get the Fed implementing quantitative easing since September of 2010, but the deflationary forces are still in play. Just look at the strength of the 10 year treasury which now has a yield below 2%.
I also said in September 2010 the stock market is trending higher. It was 10,800 then and today it is at 12,438. Regarding physical gold, I said the following;
Putting capital in precious metal stocks or leveraging gold and silver are trades, not investments. The only real investment one needs to make is in physical gold and silver. You buy it for that allocation to your portfolio and you forget about it while keeping tabs on political and economic happenings. This is what I call peace of mind.
Gold was trading at $1,310 then and today is trading at $1,644.
In January of 2011, and throughout 2011 I have been recommending investors in gold and silver dollar cost average into a position. I still feel this is the best approach today. Here is what I said;
The fact that price is secondary though is twofold. As the price of gold and silver move lower, you are obtaining a better overall price by dollar cost averaging in, waiting for the future price of gold and silver to move much higher.
So where are we today?
Things are shaping up nicely for some good moves in 2012. But this is a more difficult year to predict because it is a Presidential election year. I start my predictions off with what I think will occur politically because it is at the base of any gold, silver and stock market movement this year.
Many of you may not know, but I write quite a bit about politics too on my other blog We the Serfs! in preparation for a book I have been working on for 5 years now. It is a Christian/Political site that I hope brings awareness to people who are being influenced by the media to think the way they do. I have spent this time putting the pieces of the puzzle together the same way I clearly see how CNBC commentators criticize gold constantly.
There is no doubt in my mind that President Obama will pull out all stops to get elected again. If the stock market begins to resume its bear market trend like Dow Theory Letters writer Richard Russell thinks it will, then Obama will implement a third round of quantitative easing to “boost” the economy. All he really cares about is 4 more years. He doesn’t care about the economy. He, along with the Federal Reserve, are complicit in destroying the economy with all the easing they have been doing. They are only setting us up for a bigger fall, whenever that fall comes.
How do I know this? How can I predict that Obama would go so far as to hurt the economy to continue his quest for power? Because it was Obama who decided to announce the capture of Osama bin Laden to the world to make him look like a hero, rather than process the intelligence the military had gathered at the bin Laden compound and quash any remaining connections with Al qaeda. He was so excited to look good, he didn’t allow military intelligence to do their job. This is our “Commander in Chief.”
Obama also gave us QE1, QE2, secret bailouts by the Fed of the banks, and a second term of Ben Bernanke. So while the stock market is temporary propped up, it is more a result of the Europeans putting their money in the U.S. while they sort their mess out, than it is as a result of any Federal Reserve action. That’s why the Fed is sending money to European banks. They can’t afford the domino effect to occur should some key European banks begin to implode.
Speaking of imploding, one cannot discount what happened to MF Global this last year. It is a sign of things to come and how complicated matters will be for the nations top banks that are playing the sub-investment grade derivatives market. These banks today have sub-investment grade derivatives coming due in the next 1-5 years and the only real counterparty to them will be the Federal Reserve. The dollar value of these derivatives is over $4 trillion which is more than at the height of the 2008 financial crisis.
When these banks start imploding, it will signal the beginning of the third, “euphoria” stage for gold and silver. They say that investors lost anywhere from $600 million to over a billion with MF Global. It’s also said that MF Global did a deal with Goldman Sachs just before the declared bankruptcy. Doesn’t it amaze you how much Goldman Sachs or their former employees are in the center of controversy? The CEO of MF Global was former CEO of Goldman Sachs, Jon Corzine. Corzine also spent over $62 million of his own money on his successful Senate campaign, the most expensive Senate campaign in U.S. history.
This is the day and age of big money or personal wealth getting what you want. Just ask Mitt Romney who spent $17,413,736 of his own money on the 2008 campaign and raised another $62 million from private donors and PAC’s. His campaign ended 2008 with $17,350,000 in debts. Ron Paul’s 2008 campaign raised $28 million by comparison and he ended up $4 million in the black by the end of the campaign, money that went to start Campaign For Liberty.
It is said that Obama will spend hundreds of millions to get elected to a second term. He’s already raised $99.6 million and Romney $32.6 million for the 2012 race. Ron Paul on the other hand has only raised $12.8 million, is polling consistently in second place and the majority of his contributors, a full 60%, have given $200 or less. 61% of Romney’s contributors have given the max of $2,500.
If Obama is elected, make sure you are “all in” for your allocation into gold and silver. He has no plan for making the necessary cuts.
If Romney is elected, make sure you are “all in” for your allocation into gold and silver. He has no plan for making the necessary cuts except for Obamacare, but even that’s not enough.
If Paul is elected, it may take some time, but he will cut $1 trillion immediately from the budget, returning us to the 2006 budget. I would sell any defense related stocks, but wouldn’t necessarily sell your gold and silver because Ron Paul believes in the gold standard and competing currencies allowing gold and silver to trade right along side the U.S. dollar. This would be bullish for gold and silver as it would also eliminate the higher capital gains tax associated with precious metals.
If people had a chance to choose what currency they would want, then this would force the Fed’s and Congress hands and cause them to live within their means or suffer the demise of the dollar. The demise of the dollar would possibly mean a return to the gold standard, which the Fed does not want and neither does Congress. Austerity is nothing Congress wants. Ron Paul is good for the economy and will reduce the size of government. I see an eventual win for gold and silver but would think about converting that wealth to other beaten down investments like income producing real estate at some point (how many gold dealers do you know that would say that?).
Some of you may repeat the media mantra that Ron Paul can’t win. I have documented their attempts to influence the watcher of their shows to bring about awareness. The interesting thing is it’s not just the right leaning stations that do this to Ron Paul, but the left leaning one’s too. One has to ask why, collectively, they don’t want this man elected. One clue is simply this; they don’t want anyone to mess with the Federal Reserve. Without the existence of the Federal Reserve, Congress wouldn’t be able to cowtow to the special interest groups that throw millions at Congressmen to get what they want. It goes deeper than this, but you’ll just have to wait for my book as it is too much to talk about here and I’ve already taken up much of your time on this political issue. On a personal note, I am voting for Ron Paul and I hope he wins as I do believe it is the last chance America has to right the sinking ship.
While lately there has been some good economic news in unemployment and other areas, the cracks in this Humpty Dumpty economy are growing ever larger. As discussed earlier, banks are still not marking to market their assets (cheating) and they still have over $4 trillion in sub-investment grade derivatives coming due in the next 5 years, more than at the height of the 2008 financial crisis. The Dodd/Frank Financial reform bill did nothing to curtail these banks and this is an utter failure by Congress. They should have known if Dodd’s name was associated with it that it would fail. Dodd gave banks the ability to screw us all. Same could be said of Frank who told us Fannie and Freddie were fine.
The unemployment rate doesn’t take into account those not looking for a job any longer. How many people do you personally know in this situation? When you drive around town do you see empty office space windows with “For Lease” signs in them? Companies like Barnes and Noble, Kodak and American Apparel are on their last legs. Look at the cash flow for the last three years of these companies. Even GM is running negative. The U.S. owns 60% of GM and we have seen our investment lose about half its value so far. Thank you Federal Reserve for brokering that deal for us!
It is a cash crunch that many companies are feeling. If they are not prepared to weather this credit contraction, they are forced to lay off people in a last ditch effort to right the ship. Since banks aren’t lending in this kind of economy, the only thing left is bankruptcy or going out of business completely.
The retail sales from this last Christmas season were disappointing despite the media’s attempt to make Black Friday look like the best day ever. If the media can convince you that everyone else is out spending, then maybe you will go out and spend too and we’ll all have a nice Christmas! However, retail returns were at a record and I imagine it was because the recipient would rather have the cash than a new blender or toaster.
As to our own government debt, the debt ceiling was lifted again in 2010 and will be lifted again here in 2011 to over $16 trillion.
To understand how Congress works versus the individual, take a look at this video which you will be glad you did;
There won’t be any job growth anytime soon. There won’t be any new manufacturing companies started in the U.S. to bring manufacturing back. The economy will sputter along and if we do get the pullback in the stock market, the Fed will implement another round of quantitative easing. The economy and stock market could benefit this year from the European and Japanese economic and currency shakeup. Because this is an election year, don’t expect Congress to do anything drastic. Obama is talking the game to get elected like cutting the size of the military, but I don’t believe a word he says. Politicians will always do what is in the best interest of the banks and the Fed will always drive us deeper into an economic black hole despite their claimed good intentions and mandates.
Stock Market Prediction
Valuations don’t matter any longer. A refresher in where historical returns came from might be in order to understand what I mean by that.
Stocks used to pay nice dividends. On average this accounted for 60% of stocks historical return of 10%. This means the remaining 40% of the return came from capital growth. Today, dividends amount to around 2%. This means that a full 80% of one’s return has to come from capital growth. There has been no time in the past 100 years where a price earnings ratio around the current 21 mark results in a positive stock market over the next 10 years.
From current and recent levels in the P/E ratio, expected returns will be disappointing for many investors. Pundits are professing: “Returns will improve when the economy begins to recover!”. Hope is not a strategy. Ed Easterling Author of “Unexpected Returns”
Do I think there is manipulation in the stock markets? For sure. I used to never talk about manipulations, until a recent Bloomberg article revealed what I had always speculated where via the Freedom Of Information Act (FOIA), they were able to obtain from the Federal Reserve the secret financing arrangements with banks and European entities. Of course Federal Reserve Chairman Bernanke denies this, but are we to trust one of the individuals who got us into the mess to begin with? While many in the investment world have known that market makers at the NYSE routinely front run stocks, and Congress even is allowed to trade on insider information, it’s the little guy who always ends up getting hurt. Is it a rigged game against the small investor? Not if you know how to play the game.
With all this in mind, I don’t expect the big downfall in stocks that Richard Russell and others say is coming. I do expect it to occur at some point in time, but as I mentioned above, Obama has the quantitative easing trick up his sleeve if he needs to use it to get elected again. This will help buoy any downturn in the stock market, and help lift it to levels he needs to get elected for a second term. It doesn’t mean anyone will get rich in the stock market this year. Eventually, all of this interference by the Fed will wreak havoc on the stock market and the resumption of the overall bear market that Richard Russell speaks of will come to fruition. My preliminary guess is this will occur in 2013.
Gold and Silver Predictions
There are so many gold bugs that talk about the fall of the dollar. But in a deflationary credit contraction, the dollar actually rises along with treasuries as the “safe haven.” Dollars still represent an asset. The dollar index, made up of 57% the Euro and 13% the Yen, has 70% of it countered by lousy economies that are sure to decline putting pressure on their own currencies to perform. By default, the U.S. dollar will benefit.
But there will come a point in time where gold and silver will bottom out and the dollar should continue to rise. This will break a near 40 year pattern that has the dollar and gold reacting inverse of each other. When do I think this will occur? I believe we get one more push down in gold and silver. This will catch all those who recently bought off guard, especially those on leverage. It will challenge them to keep their investment during the downturn and have second thoughts as to why they bought gold or silver to begin with. The financial media will say “the gold bubble has popped” like they tried to do last year and the year before. They will of course be wrong.
We have just had a nice downturn in gold and silver. I don’t have any clients selling and I have been telling them to dollar cost average into a position the last 15 months. Dollar cost averaging is still the call. There will come a time when I call a bottom on gold and silver and I think it will be this year. This will signal, in my book, the beginning of the third “euphoria” stage in gold and silver. This is where the prices will go to “undreamed of” heights as Richard Russell has said. The undreamed of heights won’t occur this year but I do think we break the all-time high easily by 2013. Can we break it this year? Sure. The banking system in Iceland caused the Krona to fall 75% in one year so things can happen quickly if the banks begin to implode because of the sub-investment derivatives ticking time bomb. This is why I recommend that no matter what the price is, you have some gold and silver in your hands.
Right now, dollar cost averaging means you take price out of the equation. You buy some gold and silver now, you hope the price falls lower so that you get an overall better price. Our government, sans Ron Paul, will see to it that the future price appreciation arrives. Unfortunately, it will lead us to a possible depression, especially if they keep implementing quantitative easing and Congress passes another TARP like program to help the banks. The medicine that’s needed for the economy is to make cuts and make them now, not to borrow more and spend ourselves into prosperity.
Just like you saw in the video above, we are enslaving our children and grandchildren with the nonsense the Federal Reserve and Congress are doing today. They are the ones getting fat off of their wheeling and dealing in bailing out their favored sons. Don’t let it happen again. But since we know Congress pretty much does what they want, with a complicit media, the insurance that gold and silver provides is the only remedy. One must protect themselves from the coming collapse of the economy. Buying gold and silver today at these prices or a bit lower will be the best move you ever made.
Have a great year and do your homework on the candidates. I will announce when my book “We the Serfs!” is available.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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