Stock market rally likely to continue, with gold an outlier

QE Kool-Aid is back, taper slinks off to hide. For now. Photo: AP/file

WASHINGTON, June 10, 2013 — Wall Street looks to open up this morning, following through from Friday’s torrid relief rally. Traders returned to the bullish side, noting that poor employment numbers would encourage the Fed to continue QE indefinitely before the dreaded “taper” would begin to take effect. Unfortunately, that’s a beast that will need to be dealt with sooner or later.

But traders Friday clearly indicated that later is better.

What’s really been taking it on the chin lately, QE or not, are emerging markets, particularly those in countries collectively known as the BRICS: Brazil, Russia, India, China and South Africa. Almost all the major stock indexes are lower in the five countries. The market in the U.S., by contrast, is up 15 percent.

Ironically, BRICS are still a good buy in the eyes of many investors, who think this year’s declines are just a temporary blip and not a long-term trend.

What has made emerging markets so attractive in the first place — namely, untapped potential — is still in ample supply in the BRICS. For most, their workforces are young and expanding; their poverty rates are falling; their life expectancy is growing. Together, they account for about 42 percent of the world’s population. Their demographics are “way, way better” than the developed world’s, says Derrick Irwin, portfolio manager at Wells Fargo Advantage Funds.

But the downside to the BRICS, as is true of other emerging markets, is the dependence of their economies, for the most part, on the export of raw materials. And that’s a business that’s been way down this year, given the tepid growth and near-recessionary economies in the rest of the world. There’s simply less demand for raw materials right now. And until that changes, all these economies will suffer the impact.


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As for the U.S. market, we still remain pessimistic, at least for most of the summer. Given the extraordinarily short-term oversold conditions of markets last Wednesday and Thursday, Friday’s big rally was scarcely a surprise. And that action could continue for at least a couple more days. Intermediate and longer term trends, however, are less certain.

  —AP contributed to this report

Today’s trades:

We’re still inclined to stay mostly in cash right now, but may take a short-term chance on two ETFs: SPY, which represents the S&P 500, and DIA, aka the “Diamonds,” which tracks the Dow Jones Industrials (DJI). Even these potential forays, however, are likelier to be trades rather than investments. Wall Street hotshots are just too quick on the trigger these days for the little guys to even attempt something like buy-and-hold without getting their clocks cleaned in rather short order.


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After last week’s bear raid on gold (which could still be in its last stages), we’re also willing to consider that the bottom is in for the precious metal, leading us, perhaps, to take up a small ETF position. Actually, we’ve been sitting on just a few shares of IAU throughout this latest shakeout, and we’re down only slightly.

But we may start sneaking in to a position in a lesser-known gold ETF, the Sprott Physical Gold Trust (PHYS). Named after the Canadian fund manager, Eric Sprott, who runs it, PHYS actually invests only in physical gold and takes delivery of the bars, as opposed to ETFs like IAU and the somewhat more popular (and more expensive per share) GLD which don’t actually hold their gold.

PHYS is less liquid and less-known than the other two. But we are beginning to get suspicious of the bizarre and counter-trend moves we’ve been seeing in gold since early last fall at least, and have begun to wonder, if only a little bit, whether the “gold” we see being whipsawed in mass quantities on world markets actually exists beyond the IOUs that represent various holdings.

In point of fact, central banks around the world have increasingly been “repatriating” gold to their own vaults over roughly the past year. Traditionally, paper certificates, IOUs, whatever—and we’re oversimplifying here—have been enough in the bullion market to transact business smoothly, and even many large countries have not worried about their own government-controlled bullion has been held elsewhere in other countries, at clearing houses, or in the vaults of large multi-national banks.

But now, many countries like Germany are taking back physical holdings for storage in their own government vaults. Hence, the term “repatriation.” The only reason we can think of as to why they might be doing this is an increasing lack of trust in institutions. In other words, Germany and other countries are now feeling better about themselves if the gold they supposedly own—which backs both currencies and economies at least implicitly—if they actually have the yellow metal stored in their own vaults where they can see it and touch it and make sure that it’s real.

What’s been going on has been very, very quiet until now. But it’s not gone unnoticed. If governments worldwide are repatriating gold, something is up. And, as we’ve already learned, every government, including our own, will take care of themselves and their fat cat patrons first before they let we the people in on anything.

There might actually be nothing to see here at all. But recent experience should have taught us by now that impending bad news can be a bit like an iceberg. Everybody sees what’s floating on top of the water. But most will disregard the invisible menace that lies below the surface and out of sight. Governments generally know what’s lurking there. But they’re not inclined to tell us until politicians and their wealthy enablers have been taken care of in advance of a disaster. So let’s keep our eyes open here on the present weirdness of gold, and take a few defensive measures ourselves just in case.

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

Follow Terry on Twitter @terryp17

 

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

Follow Terry on Twitter @terryp17

 


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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  

 

 

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