Soon GOLD AT 1000?

A recession in the US or a mere slowdown? That is the question of the most recent days. For a while now I, and many of my colleagues, have been bear believers. The bears have woken from their hibernation and are back with a vengeance!

The truth of the matter is that the optimists are saying that we need not worry as companies are still reporting profitability. While this is a good and valid argument, it does not take into account the fact that there is a time lag until various companies start showing the true picture of the economy. I believe that the results from Q2 onwards will start to become gradually worse.

The other aspect is that we have not had a large enough decline to have a sufficient bottom for a bear market. I would guess that we are about half way down or perhaps just before half way.

When Gold hit 900 for the first time, I was of the opinion that it was overbought and that a small correction would take place. Then later, I went into work when the price had fallen to about 850 and said to my colleagues, today is a good day to long gold… and sure enough, it was the day it went to almost 900 again. I think that the gold price will almost certainly break through the 1000 barrier soon. I also believe that the long-term investor should understand that the price will return to the 500 to 600 mark in the next 5 to 7 years. If you look at the charts, this is what they show. I would say that silver is a bit different but it would be safe to assume that it will reach near 20 over the next few months. Oil will most probably return to the 100 mark and trade in this range going forward.

Lastly, this seems like the opportune moment to short the market. Whether you choose to short the DAX, the S&P500 or the MSCI, it does not really matter that much.
Until next time!

CHANGE YOUR PORTFOLIO FOR THE NEW YEAR!

If a client were to come to me now to invest his cash for him and to come up with an investment proposal, I would have a completely different outlook than what I had about 6 months ago.

My current selection would be as follows:
10% to 20% in equities
30% to 40% in bonds
10% to 15% in precious metals
This means that with as little as 50% invested to a maximum of 75%. The remaining would be in either cash or a money market instrument.

The rationale for this increased cash position is that it is becoming clearer that the Bull Run in equities is nearing its end. As you can never time it perfectly, I think that missing a little performance on the up side, for some added safety is prudent at this stage. The equity portion would be focusing in emerging markets, as you do not want to miss out completely in some economic growth that should continue.
I would hold or even increase a bond position at this stage as the rate cuts seem to be a given in the mid to near future so the value of the bonds should increase as these cuts come through. This would be more of a trading play (including an attractive yield) with a maturity period of approximately 2 years.
In terms of precious metals, at this stage you have to soberly look at the outlook. I for one, believe that gold will increase more and could go as high as 1000 or even 1200 but in a couple of years or in five years, the price could (and perhaps should) return to 500 or 600. This effectively means that on a trading basis I would hold some metals in the portfolio but would not be a gold bug just buying and holding. The clear strategy, in my eyes, is to sell when you have a profit of about 10% to 15% and to buy back in when there is a correction of about 10%. With the current movements being quite rapid, you should be able to do this about 3 times in a year.
With my cash position, I would use small investment opportunities to trade in options as and when they arise. In terms of currencies, I would expect that the USD would get even weaker but the weakness will start to slow and a new level should be found sometime next year (2008). This had 2 factors, the fact that this is an election year in the US and the markets should slow down in anticipation of this. The other factor is that at a certain stage, the remaining markets will also start to slow down (e.g. Britain) and it will not be USD strength but weakness of the other currencies. Lastly, the weakness should continue in the short term as the interest rate differential is closing while the FED is cutting rates and would take some time to stabilise.
In conclusion, the time has passed when you could have a 60% equity, 30% bond and 10% metals portfolio.

SILVER – Opportunity to buy or still too high?

Silver has been hovering around USD 13.3 and 13 for the last few weeks. It was higher a few months ago and could return there (and higher) but before that, it was much lower and could return there as well. When it comes to Silver many people have started regarding Silver as a safe-haven investment (much like Gold). This is partly true in that the profile of Silver has risen in terms of investors but the truth of the matter is that this a temporary phenomenon because it is widely used in industry. When Silver increases in price, you have to consider why this is happening… is China demanding so much Silver that we can justify the considerably higher prices? Perhaps, but how high are we going to allow Silver to go under this consideration when Silver can be replaced (in industrial use) by other metals or reclaimed Silver when it becomes too expensive?

At this stage, I think that if I were holding Silver I would think of selling when it goes higher that 16 or 17 (depending on how low I bought). I would not but a new position at anything above 13.5. In terms of short-term speculation, I like to use leveraged certificates to make the investment more attractive and to make profit in falling prices possible. When we are talking about buying at 13.5 and selling at 16, we have to consider that this is about 18.5% appreciation and when you consider the spread involved on both purchase and sale and the fees on top of that, the profit we can hope to gain is about 15%. This is a very good return for trading short term but when you think that you know the risk that the price could fall considerably and accept this risk, why not choose to purchase a two times (X2) leveraged product that would make your profit margin 30%? One of the companies that offers products like this is ABN Amro. I had used one of their short certificates on Silver just before the correction in February and made about 42% in 2 weeks. My rationale was simple, based on technical analysis (on its most basic level) I saw that the price was reached the high 16s twice before and failed to make it far past that level and was lucky enough to pick almost the top and sold when it went to 13.8 (you can’t always pick the tops and bottoms). You have to set yourself realistic targets of stop loss and profit taking and stick to them as much as possible, there are exceptions to the rule in that if you are good enough to reach you target easily and wish to take a bit more of a profit. Although, in such an event, it is advisable to take a part of your profits at your original target, that way if it turns against you, you have played it safe.

The above is a relatively risky strategy and would not suggest it if you are unsure of what you are doing. You have to understand the risk and accept it on your terms.

You might find this site helpful: www.kitcosilver.com