October is, historically, an interesting month in the markets. This year has been no different, with volatility all around. The stock market dropped below 16,000 before rallying back up over 17,500. Volatility has continued in the precious metals market, mainly to the downside, although gold went up more than $37 dollars on Friday.
Let’s delve into the factors that are driving the volatility of these markets and what it means to our economy and our investments….
One factor that influenced the dollar strength and the move up in the US stock market is Japan’s record expansion of stimulus last week. The Central Bank of Japan (BOJ) stated its intention to buy 8 to 12 trillion ($108 billion) of Japanese government bonds per month. So the BOJ may buy every new bond the government issues. The BOJ could end up owning half of the JGB market by as early as 2018, according to Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo. Okubo wrote, “The BOJ is basically declaring that Japan will need to fix its long-term problem by 2018, or risk becoming a failed nation.” The yen has been falling since 2012 because the market is questioning its quality. Traders borrow yen, trade the yen for another currency, and buy an asset in that currency. This is shorting the yen, and is a good trade as long as the interest rate on the bond in the other currency is higher than the interest rate paid to borrow the yen. However, as the yen falls faster, traders can repay the borrowed yen at a cheaper and cheaper cost until the yen goes to zero, and the debt is wiped out. So what are the implications of Japan’s actions? Japan is purposely stoking the fires of hyperinflation in order to weaken their yen in order to wipe out debt. This is what a currency collapse is. While it may be good for debtors, it is catastrophic for business and the human beings who make up those businesses. Let’s hope we can learn from Japan’s mistake.
The strong stock market is driven by a perception of a strong dollar. As I have stated in my previous blogs, the dollar is strong based upon the weakness of other currencies such as the euro, Russian ruble, and the Japanese yen, as shown above. Several factors are driving the strength of the dollar. One was the anticipated Republican landslide in the November midterm election. The market anticipates future events. The Republican landslide indeed happened. Now is the time to remember the old adage about markets, “buy the rumor, sell the news.” Another reason the stock market is high is because the interest rates have been held artificially low by the Federal Reserve’s stimulus policies. When you get information from false rates, mistakes are made, causing bubbles. One example is buy backs. Corporations borrow money at low interest, and some of that money is used for buy back in stock, thus pushing up the stock market. Another consequence of cheap credit is unprecedented amounts of government and private debt. This cheap credit in turn inflated equities to all-time highs. Eventually, those bubbles have to correct. America, as a nation, is 18 trillion in debt, and the fed has been using quantitative easing to create money (credit) over the past dozen years, through both Democrat and Republican administrations, that far exceeds the entire amount of currency printed in the history of the United Sates from George Washington’s inauguration to 1980.This is fiat money, with no backing in gold since 1971, and when these markets fall, there will be global implications. The 16th Geneva Report, just released by an international group of academics and central bankers has uncovered that global debt, excluding the financial sector, has risen 36 points to 212% of GDP since 2008. So we have a poisonous combination of rising debt levels, helped along by cheap credit, and slow economic growth. It won’t take much to cause these markets to fall.
Any global event could trigger a rise in the precious metals price as evidenced today by news of Russian tanks and troops invading the Ukraine. The news caused gold to shoot up 30 dollars. This invasion could be a significant escalation of a conflict that has killed more than 4,000 people since the separatists rose up in mid-April, and the two-month-old ceasefire deal looks particularly fragile. Russia blames the crisis on Kiev and the West, but NATO says it has overwhelming evidence that Russia has aided the rebels militarily in the conflict. Moscow’s relations with the West are at their lowest since the Cold War. Western governments have imposed sanctions on Russia which have aggravated an economic downturn in Russia, whose ruble currency is in sharp decline.
So I see this time as a buying opportunity for gold and silver. And right now, in my opinion, silver is an even better buy than gold. This is because of the gold/silver ratio. Let me explain. Since 2000, the gold/silver ratio has mostly traded in a range between 45:1 and 60:1, but has averaged about 55:1. Right now, gold is 75 times (75:1) the price of silver. This means that exchanging gold for silver, or the outright purchase of silver, could be advantageous at this time. Silver is an industrial metal, as well as an investment metal, that will always be in demand. For decades, the demand for silver has exceeded the production. Gold is selling at 90% of production cost, while silver is at 85% of production costs. This may explain the acute shortage of physical metals, as evidenced by the U.S. and Canadian mints completely sold out of American Silver Eagles and Canadian Silver Maple Leafs until at least January, 2015.
Be prepared for coming inflation and a correction in the stock market by diversifying part of your portfolio with precious metals at bargain prices. These prices on metals will not last. Talk to one of our Precious Metals Experts to see how silver and gold can help protect and hedge your wealth in uncertain economic times.
I believe that buying metals now is more attractive than it was even a week or two ago. Gold dropped as low as $1,140.00 this week, causing it to sell at 10 percent below production cost. Silver dropped to $15.50, selling at least 15 percent below production cost. These historic lows make buying opportunities that won’t last long.
Listen to my interview this past Friday afternoon with Sinclair Noe at KFNN MoneyRadio 1510 AM Phoenix regarding this topic by clicking the play button below.