Terrible day for the markets yesterday…
It all started with June crude oil futures down about $9.00 a barrel, the U.S. dollar up sharply and the precious metals down. June gold futures were down about $34.00 an ounce, bringing the metal back below the $1,500 level. There was more pressure on silver prices, too (I explained why yesterday in my editorial, Why Silver Prices Are Falling So Quickly).
So, what are we to make of this and what action should investors take?
In times of volatile markets, I go back to the basics: No investment or commodity rises straight up during a bull market or falls straight down during a bear market.
Aside from its dip during the Great Recession of 2008/2009, crude oil has been in bull market since September of 2001. Common sense dictates: in the U.S., there are approximately 80 cars for every 100 people. In the world’s fastest growing economy, China, there are only 13 cars for every 100 people.
Oil is limited in supply. Electric and solar cars have not been successful. Oil is not only used for powering our vehicles and heating our homes, but also can be found as an ingredient in many of the items we use daily, including plastics, paint, synthetic fibers, make-up, and even medicine.
The law of economics says that when you have limited supply (as we do with oil) and increasing demand (from evolving countries like China and India), prices will rise in the long term. About 60% of the U.S.’s oil needs are satisfied by foreign countries, the top four being Canada, Mexico, Saudi Arabia, and Venezuela. Only 10 years ago, the U.S. was the main oil customer of these countries. Today, the U.S. competes with China for oil from these four countries.
Bottom line: demand for oil is rising, not declining. However, supply is limited.
Moving to gold bullion…
The greatest financial story of the past decade has been the quiet bull market in gold bullion. The metal has moved from $300.00 an ounce to $1,500 an ounce in about 10 years’ time. If we look at a 10-year chart of the U.S. dollar against other world currencies and a 10-year chart of the price of gold bullion, there is an almost perfect inverse relationship. The U.S. dollar falls in value, gold rises in price.
If you believe that the Fed will stop printing money, if you believe that the U.S. government will get its budget under control, if you believe that inflation will not be an after-effect of too many dollars in the system, and if you believe that the national debt will not hit $20.0 trillion by 2020, then you shouldn’t be in gold bullion.
For me, I’m staying the course. I realize every time the price of crude oil or gold falls that investors are taking some profits off the table…and that’s exactly what they are doing. There has been a tremendous amount of money made trading oil and gold in their bull markets. It is normal for investors and traders to put some of those profits in their bank account. Remember, no bull market goes up in a straight line. Corrections are not only normal; they are healthy, especially for the bull market in gold.
When I look at the price charts right now, I see that gold could easily correct to $1,400 per ounce. With each correction in the price of gold, I’m adding to my holdings, not selling them. I’m staying the course.
Where the Market Stands; Where it’s Headed:
The Dow Jones Industrial Average has shed 229 points in the last two trading days. Big deal, I say. We are dealing with a bear market rally that has brought the Dow Jones Industrials up nine percent alone this year and up 95% since March of 2009. A couple of down days does not put an end to the “tiring” bear market.
My opinion: the bear market rally is still alive. Upside is limited, but there is more upside potential in this market.
What He Said:
“Any way you look at it; the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way, oblivious to what is happening to homebuyers’ wealth. (Since 2005, I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.