Tag Archives: Dow Jones

The Fed Destruction & A Cascading Panic Among Investors

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On the heels of continued propaganda from the Fed today, 40-year veteran, Robert Fitzwilson, wrote the most extraordinary piece for King World News.  Fitzwilson, who is founder of The Portola Group, discusses the tragedy of what is unfolding and how key markets are responding such as gold and silver to the ongoing drama.

Below is Fitzwilson’s exclusive piece for KWN:

Fitzwilson:  “Whether intended to be so or not, today was the equivalent of the stress tests that the Federal Reserve and their counterparts overseas conducted on banking institutions.  It was the markets instead which were tested this time.

Early into the trading this morning, Chairman Bernanke suggested that it was too dangerous to tighten monetary policy.  His comments caused equities and precious metals to soar and U.S. Treasury interest rates to decline.  His words suggested more printing, more asset purchases and continuing inflation of the stock and bond bubbles….

“Subsequent to those comments, Chairman Bernanke then suggested that the so-called “tapering” of quantitative easing could also be on the table.  Stocks and precious metals sold off, and interest rates spiked higher.  The range for the Dow Jones Industrials was almost 300 points on the day.

For gold and silver, the spread was $60 and $1.14, respectively.  Brent crude oil also had a wild ride during the day, ranging between $103.79 and $102.22 per barrel.  The most interesting market move today was for many of the gold and silver mining companies.  There were very strong performances.

We also had the release of the minutes for the Fed Open Market Committee meeting conducted on April 30th and May 1st.  The views expressed at the meeting were at times dovish and others were hawkish.  This too caused more turmoil in the markets, with the Dow Jones, gold, silver and oil all finishing near the lows.  Interest rates closed near the highs as fixed income sold off.  One observer said that the Chairman had an insurrection on his hands.  Maybe, maybe not.

Source: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/5/23_The_Fed_Destruction_%26_A_Cascading_Panic_Among_Investors.html

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Demand for Gold Coins Goes Through the Proverbial Roof

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Demand for Gold Coins

Similar to everything else financial, gold bullion prices follow the same main premise of economics: prices rise when demand increases, and prices decline when the supply increases.

At present, on the demand side, we have central banks buying gold bullion. In fact, they have turned into big buyers, collectively buying the most gold in 49 years in 2012. Central banks are buying gold bullion because they need it, as the fiat currencies they created are causing great havoc to their reserves. In these pages, it is very well documented which central banks are buying. What is interesting is that the list of gold bullion purchasers is increasing.

Demand from individual investors for gold bullion is also increasing. In the first three months of 2013, the U.S. Mint sold about 40% more gold bullion coins than it did in the first quarter of 2012. It sold 292,500 ounces in coins of gold bullion from January to March of this year, compared to 210,500 in the same period of 2012. (Source: The United States Mint web site, last accessed April 2, 2013.)

Now, for the supply side of the story; worldwide gold bullion production from mines in 2012 totaled 2,700 tons. Compared to 2011, the increase in gold mined was a menial 1.5% in 2012. (Source: “Mineral Commodity Summaries,” U.S. Geological Survey web site, January 2013, last accessed April 3, 2013.)

In 1990, worldwide gold bullion production from mines was 2,127.3 tons. A simple calculation shows gold bullion mine production has only increased about 27% over a 23-year period, or a compound annual growth rate (CAGR) of 1.04% per year. (Source: United States Geological Survey web site, last accessed April 2, 2013.)

When I look at the current demand and supply equation of gold bullion, I affirm my bullish status on the metal.

There hasn’t been a major world discovery of gold bullion in years. Nor are any major mines expected to come on-line in the next three years. We have supply that isn’t really changing, but we have robust demand, as central banks and individual investors alike are rushing to the metal.

The recent pullback in gold bullion prices is very normal. Only in bubbles do prices increase without rest. I continue to see gold bullion having a shiny future ahead.

(Want to know what gold stocks are the best buy right now? In our just-released special report, Lombardi’s Second Quarter 2013 Gold Forecast Report, you’ll find our analysis of the U.S. money supply and its implications for gold; current gold supply and demand; central bank activity in the gold market; our specific price projections for gold bullion; our top-five senior gold stock picks; and our top-five junior gold stock picks, all complete with charts. Click here for ordering info.)

Michael’s Personal Notes:

In the first quarter of 2013, key stock indices like the Dow Jones Industrial Average and the S&P 500 rose an unprecedented 10%.

Below, I’ve charted a comparison of the performances of the Dow Jones Industrial Average and the S&P 500:

DJLA S&P 500 stock chart

In economics, the stock market is often referred to as a leading indicator. If the market is rising, as it has been, it is an indicator that the economy will improve in the months ahead. But, as this stock market has been rising, economic data have not been improving.

As I have been harping on about in these pages, the key stock indices are rising on nothing but optimism and an ever-increasing money supply—both of which can only last for so long. Economic uncertainty is still present and future expectations are dismal.

For the first quarter of 2013, 86 S&P 500 companies have issued negative corporate earnings guidance—that’s 78% of all the S&P 500 companies that have issued earnings guidance so far. (Source: FactSet, March 28, 2013.)

The Manufacturing Purchasing Managers’ Index (PMI), monitored by the Institute for Supply Management (ISM), decreased 2.9% from February to March. The index stood at 51.3 in March, compared to 54.3 in the previous month. (Source: Institute for Supply Management, April 1, 2013.)

As for unemployment, it is still very high. On Friday, the Bureau of Labor Statistics (BLS) will be reporting the jobs numbers. It won’t surprise me to see the unemployment rate unchanged (maybe even rise), because companies on key stock indices are looking to cut their costs—and the only option left for them is to decrease their workforce.

On top of this, risks in the eurozone still persist. These debt-infested countries are suffering. Greece is in an outright depression. Italy and Spain are witnessing their economic conditions quickly eroding. The two strongest nations in the region, Germany and France, are starting to see their economies slow. A significant number of U.S. companies on key stock indices derive their revenues from the eurozone.

The key stock indices may rise a bit as irrationality can go on for a while. In 2007, the economic conditions in the U.S. economy were anemic, but the S&P 500 and the Dow Jones Industrial Average were driven to all-time highs. Later we witnessed one of the steepest market sell-offs ever registered for key stock indices. The same thing could happen again this year with the markets.

What He Said:

“The conversation at parties is no longer about the stock market, it’s about real estate. ‘Our home has gone up this much or our country home has doubled in price.’ Looking around today it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in Profit Confidential, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Source: http://www.profitconfidential.com/gold-investments/demand-for-gold-coins-goes-through-the-proverbial-roof/

Reading The Dow v. Gold Ratio

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Stock Market_5

“I hate seeing myself misquoted, misinterpreted or just misunderstood,” says our friend Fusion IQ chief and Big Picture blogger Barry Ritholtz. We can relate, given the reaction we get when we start talking about Treasuries, why we hate them and why we own them anyway.

In February, Barry suggested that the long ugly bear market in stocks that began with the bursting of the tech bubble in 2000 is closer to the end than the beginning. His analogy was a baseball game in the seventh or eighth inning. Soon he found himself forced to write, in bold and all caps that we’ve faithfully preserved here: “I DO NOT KNOW IF IT’S OVER.”

A few short weeks ago, the Dow Jones industrials were only 40 points off an all-time closing high. On Thursday, it went even higher, rising over 52 points, to close at 14,578. Whether the bear market is over or not is relevant to The Most Important Financial Question You Face — a question we explored in Apogee Advisory in July 2011. Today, we update the forecast…

Midyear in 2011, we posed the question: Will your dollars have less or more purchasing power in the future? In early 2009, at the depths of the financial crisis, a gallon of gas cost $1.75. Deflation. After much up and down in the ensuing four years, it sits at $3.63 as we go to press. Inflation. Many were the nervous retirees glancing at dwindling 401(k)s, IRAs and individually directed accounts.

Avoiding the drama, we replied: You don’t have to get the answer right. It’s a trick question.

Appropriate for April Fools’ Day, no?

Fact is, you can use a simple yardstick… make one simple investing decision… and be right either way. The yardstick is the Dow-gold ratio: the Dow Jones industrial average divided by the price of gold.

Dow-Gold Ratio 1900-2012

Turning points in the Dow-gold ratio have coincided with turning points in market history: The stock market reached historic highs in 1929, 1966 and 1999 as the ratio did the same. Likewise, the market sat near historic lows in 1932 and 1980 as the ratio hit bottom.

If history is any guide, the ratio is on its way back to the 2:1 or 1:1 levels of those historic lows.

Of course, how we get there is critically important. In a severe deflation — think early 2009, but far worse — gold might retreat to $1,000 an ounce and the Dow would sink to as low as 1,000. On the other hand, an episode of hyperinflation — think Weimar Germany and wheelbarrows of cash — could bring $100,000 gold and a 100,000 Dow.

Both of those are doomsday scenarios. We didn’t think either one likely. Instead, we posited two “plausible scenarios.”

  • Plausible Scenario No. 1: Gold tops $6,000 — a reasonable figure, in light of gold’s 24-fold gain during the 1970s. At a 2:1 Dow-gold ratio, the Dow would be around 12,200
  • Plausible Scenario No. 2: This is the “David Rosenberg scenario,” suggested in mid-2010 by the chief economist for Gluskin Sheff. He figured on $3,000 gold and the Dow bottoming around — gulp — 5,000. That’s a Dow-gold ratio of 1.7:1. For the record, he’s sticking with that outlook.

Back in 2011, we thought Mr. Rosenberg’s scenario the more likely one. But the passage of 20 months since our original report has forced us to rethink. We’ve pored over the same charts we used to make our case in 2011… and reached a revised conclusion.

Our new thinking is informed in part by our misunderstood friend Barry Ritholtz. In 2003, Barry held the lonely position that stocks had entered a new “secular bear market” — a long-term period of up-and-down churning.

His stance did not make him a hit at dinner parties — not at a time the Dow had roared up 27% from a low near 7,300 in October 2002. But his view lined up with our own in the original Trade of the Decade we unveiled in January 2000 — “Sell stocks on rallies; buy gold on dips.”

Barry’s view was borne out as the Dow plumbed new depths of 6,549 in early 2009.

“Historically,” Mr. Ritholz writes, “secular bear markets are extended periods of range-bound trading,” complete with “vicious rallies and wicked sell-offs… within the larger timeline.”

According to research from Fidelity, they typically last as little as 12 years and as many as 22. The average is 14½ years. During these ugly episodes, the market delivers a return of only 1%. And after you factor in inflation, it’s actually a loss of 2.3%.

We now sit in the midst of the fourth secular bear market since Charles Dow developed his famous index of industrial stocks in 1896. Each of the four is spotlighted in this chart from Merrill Lynch:

Dow Jones Industrials Since 1900

Let’s zoom in on the third box of this chart — the bear market that punished stockholders relentlessly from 1966-82. We shared it in our original report…

Dow Jones Industrials February 1966 to August 1982

Now let’s zoom in on the fourth box — the bear market that started when the tech bubble began to burst in early 2000:

Dow Jones Industrials January 2000 to Present

Aside from “vicious rallies and wicked sell-offs,” the market hit bottom eight or nine years into the cycle. Sure, if you were a brilliant market timer, you could have bought at the bottom in 1974… but unless you invested as wisely as Warren Buffett did at the time, you didn’t miss much by holding off until 1982, when a new secular bull market got under way.

Each of the three bear markets preceding the current one has that same characteristic. It’s the red arrows in the “fearsome foursome” chart going back to 1900 — a bottom midway through the cycle, a number on the Dow that once hit is never to be seen again. Yet if you stayed out of the market another seven or eight years, you wouldn’t have regretted it.

Source: http://dailyreckoning.com/reading-the-dow-v-gold-ratio-part-i/