Gold Cracks $1000/Oz: Investing For A Recession
Based on continuing weakness in the dollar, gold briefly breeched the $1000 level yesterday along with oil hitting an all time high of $111 per barrel. I had a really strong suspicion that we’d see $1000 gold by mid-March.
Despite what Bernanke and Paulson said last summer, the housing bubble has spread to other parts of the economy and subprime mess has not been contained. In a last ditch effort to prevent banks from collapsing, the Federal Reserve announced a bailout of Fannie Mae, Freddie Mac and other banks, promising to exchange bogus mortgages for Treasuries during a 28 day window. They named this Term Securities Lending Facility (TSLF) but it’s just a good old bail-out.
Of course, the stock markets loved this move because it means the Fed is going to prevent banks from failing. However, this $200 Billion bail-out doesn’t come without a cost. The Fed is going to have to print an extra $200 Billion to cover this deficit. But it was a clever move, because Bernanke didn’t have to cut interest rates before the 17th of March, when he’s slated to do so anyway. Another move like that might have created a panic in the markets instead!
Bloomberg reported today that OPEC is going to make about $927 Billion dollars from the sale of oil this year. That’s almost $1 Trillion dollars! Worldwide, sovereign wealth funds (SWF) are thought to be worth about $2.8 Trillion. Considering that the combined wealth of global nationalized assets is about $12 Trillion, that’s really impressive. It probably means that SWFs and OPEC will start buying up pieces of America, since they really can’t do much else with all those US Dollars. Of course, they could buy Treasuries, but it seems like everyone’s now realizing that they’re useless as the dollar keeps on devaluing. Meanwhile, the US government is helpless against stopping the sale of US assets. Our own SWF is negative $9 Trillion, so we have some catching up to do before we can actually buy anything. I think the government’s best bet is to make all those Trillion worthless by printing more and more dollars. Bernanke knows this and so far he’s doing a bang up job. Of course, this leads to severe inflation, but don’t say I didn’t warn you.
Considering how wrong our economic advisers have been so far, I think it’s safe to assume the 0.3% GDP growth that’s forecast for the year is a tad optimistic. While everyone’s still denying it, I think we’re already in a recession and along with inflation, that amounts to a 70s style stagflation scenario.
Considering that consumer spending has slowed down and is likely to continue, US companies are going to go through some tough times. How do you protect your stock investments then? You can’t sell them and move to cash, because the US dollar is sliding too. Coupled with inflation, your wealth is going to slowly (or maybe not so slowly) erode over the next several years.
Here are some investment ideas:
1. Diversify into foreign currencies: I like Australian Dollars, Swiss francs, Japanese Yen. Jim Rogers likes Chinese Remnimbi and Warren Buffett like the Brazilian Real. Take your pick.
2. Buy US giants with international exposure: Consumer staples have historically done very well over the past 60 years, regardless of the economic scenario. I like stocks with a decent dividend yield like Pfeizer (PFE), Johnson and Johnson (JNJ), Merck (MRK), Unilever (UNL), Proctor & Gamble (PG), Kraft Foods (KFT) and Anheuser-Busch (BUD).
3. Invest in agriculture: Bush’s moronic plan to reduce our reliance on foreign oil by substituting ethanol has only resulted in a surge corn prices. The economic growth in countries like China, India, Russia and Brazil is increasing the size of the world’s middle class. These people will be improving their diet and adding more meat and veggies. They’ll also be drinking more milk. There’s already surge in global prices of all of these soft commodities. There are quite a few ETFs that will help you profit from these trends, like PowerShares Agriculture (DBA) which consists of 30% soy, 28% wheat, 23% corn, 16% sugar, Van Eck Agribusiness (MOO) [8% Monsanto, 8% Mosaic, 8% Komatsu, 8% Potash Corp] and PowerShares Commodity (DBC) [33% crude oil, 20% heating oil, 14% wheat, 11% aluminum, 10% corn, 10% gold].
Along with this, a demand for fertilizer will result in compannies like Potash Corp (POT) doing very well. If you’d like to invest in milk, American Dairy (ADY) and Dairy Crest (DCG) are too suggestions, but I haven’t done much research on them.
4. Buy Gold: I don’t think it’s too late to start investing in gold. You can buy gold coins and bars, the gold ETF (GLD) or mining stocks (GDX).
5. Invest in Metals: The global boom is creating a huge increase in the demand for metals like copper, iron, aluminum, zinc, etc. Mining stocks like BHP and RIO have done very well. Indian company, Sterlite (STL) also looks like it has good long term prospects.
6. Invest in Infrastructure: Not only is America’s infrastructure collapsing, but global growth makes betting on infrastructure a safe bet. I like Brookfield Infrastructure Partners (BIP).
7. Invest in Oil and Gas: Major oil companies like Exxon-Mobile(XOM) have served its investors well for decades. I’ve also invested in direct oil drilling programs, which go out and drill wells with your money and give you a share of the proceeds. I also like Canadian Royalty Trusts that invest in oil fields. There a few new ETFs that buy heating oil and gasoline futures. I’d stay away from these as their performance is as yet unknown and they might be subject to backwardation and contango.
8. Invest in Water: Water pipes all over the US are breaking. Built after WWII, these pipes had a lifespan off about 50 years. As the nation replaces these pipes over the next several years, cast-iron pipe companies are set to make a killing. Check out NorthWest Pipe (NWPX) and the water ETF (PHO).
I don’t know about the rest of US, but Nevada and Southern California are going to face a huge water shortage in the next decade. Most of the water comes from Lake Mead and the tremendous population growth in Las Vegas and Henderson has tapped the limits on the lake’s capacity. Check out this photo:
Dont’ you think a company that owned the water rights in Nevada and California would make a decent amount of cash over the next few years.
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- Rogers Still Bullish On Commodities Jim Rogers recently gave a presentation in Vancouver, Canada where he reiterated his belief that we're in the middle of a commodities bull market. His logic is simple: the supply of paper currencies in increasing while the supply of hard commodities like aluminum and copper is dwindling. He also believes......
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How To Invest In Gold The first question you're probably asking is whether gold is a good investment to begin with. Take a look at the performance of gold prices over the past 5 years versus the stock market. [Updated on June 2011] As you can see, gold is up more than 250% since 2005,...... - Gold Hits $750/Oz Today gold hit $750, the highest its been in 28 years. It looks like we might break the previous intra-day high of $850 within the next few months. There was a slew of bad news today related to the housing industry and inflation worries and both oil and gold reacted by going up. I bought......
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March 15th, 2008 at 7:04 am
I love free books!
I’m subscribed to the feed as well…
March 15th, 2008 at 1:11 pm
A friend of mine recently told me that he had invested in some Canroys, and he convinced me that it’s better than leaving money to rot on a savings account. After further research I came across your blog, and I added it to my netvibes feeds. Thanks.
March 15th, 2008 at 3:31 pm
I think you have a great investment thesis described above. I have been modeling a portfolio with a similar thesis. My overall thesis was preservation of capital in a declining equity market with a positive annual return. I agree with your comments regarding investment in foreign currency and I believe you can do this through several ETF’s…i.e. FXY (Jap – Yen), etc.) Better yet continue to short the dollar on any rallies.
I like your idea of the large cap consumer staples investment, I would caution people NOT to do this through the ETF, I believe (XLP) Spiders Consumer Staples, but through regular purchases of Proc & Gamble (PG), Altria (MO), Anheiser Busch (BUD), Coca Cola (KO), Johnson & Johnson (JNJ), Kraft (KFT) & Unilever (UNL). Not only do you get stability of capital relative to the market but these pay great dividends and are perceived as sanctuaries of stability during bear markets. The only one I take exception to on your list is (MRK) Merck, but I may be wrong. They have done very little in the last five years, and are due, but I don’t think the timing is right.
I like the DBA etf for commoditites, but it’s pretty volatile, and not for the feint of heart. You really need to understand some technical analysis before just jumping into commoditites or you’ll get run over like a freight train with some ill timed buys. Buy it (DBA) on big dips, i.e. 10%. Long term you’ll be fine, but short term time your buys & PAY ATTENTION to soft commodity prices. If you want a couple of different trading ideas to complement the agriculture commodity trade, I recently just closed some macro trades with the following thesis: Long Commoditites (DBA); Long Crude (USO); Short Ethanol (shorted VSE, USBE, ADM); Short US Equities (SDS). Very successful short term trade, and looks like it might set up well in the near future should be get any equity rallies.
The long gold thesis is one of the few parts of your strategy that I disagree with and actually will take the contrarian side. I am going to start shorting gold, through the GLD very soon, I personally feel that the trade is simply overcrowded & highly speculative and does not have any of the demand driven thesis’ that the other components of your strategy have. Just my personal opinion.
I agree with your infrastructure thesis although DO NOT limit your plays to just the US, purchase infrastructure plays that have a large global footprint. Companies that I like (AND OWN) in this space are as follows. Please do your own DD and research. (JEC) Jacobs Engineering; (FLS) Flowserve; (FLR) Fluor Corp; (MTW) Manitowoc; (FWLT) Foster Wheeler.
I personally heavily invested in Canroys & Amroys at this time. As long as crude & natural gas trade strong these are wonderful vehicles to capture not only captial appreciation but they have a great annual distribution that is paid out on a MONTHLY basis. Names in the space that I currently own are: (PWE) Penn West; (PGH) Pengrowth (ERF) Enerplus on the Canadian side & (PBT) Permian Basin Trust ; (SBR) Sabine Royalty Trust on the American side. They all pay well in excess of 10% distribution annually.
Lastly I like you believe water is the next great commodity that will go parabolic in appreciation. I like your ETF (PHO) and I own another one with a global footprint. Check out (CGW) Claymore Global Water. I also like (FLS) Flowserve in this space. Thanks for the informative post.
March 15th, 2008 at 5:06 pm
Michael,
thanks for your very informative post.
short-term, gold might be due for a pullback. but in the long term, with the continuing slide in the dollar, I think it will go higher.
thanks for your list of infrastructure & water-related companies. I’ll take a look at them in more detail.
March 15th, 2008 at 5:24 pm
Your welcome for the post. I just wanted to add a couple of things to your great invesment strategy. The other thing that I do (and am doing) that you did not include in your overall invesment strategy & thesis is provide an international component. I could make a pretty strong argument that we have ‘disconnected’ or ‘decoupled’ the US economy from global growth right now. How can we as investors take advantage of the ‘decoupling’. Well, all of livingoffdividends stratagies are excellent plays but I’ll add a couple of other plays for exposure to growing economoies. Take a look at Russia, it is a great, still under valued growth story. I personally own the (RSX) Marketvectors Russia ETF. It is highly geared toward Oil & Natural Gas, but has some telecom & retail plays in it also. I would consider it as a dual investment vehicle. A great play on nat gas & oil, and a great international play. I also own the (EWT) iShares Taiwan Index. I believe that after next weeks elections in Taiwan they are poised for a great expansion period. If you’ve noticed Taiwan has seriously lagged Hong Kong and mainland China. My thesis is the Taiwain will ‘catch up’ and outperform both in the next two to five years. The other growth play I’m in globally is the (GAF) SPDR S&P Emerging Middle East & South Africa. Another play on oil and some gold as South Africa is included. The world is shipping enough wealth to the middle east, you may as well get some benefit from it. Another smaller play that I’ve heard global growth analysts discussing a lot recently is Turkey. I have yet to purchase anything in the space, but, I have the (TKF) Turkish Investment Fund on my radar screen. Just some international thoughts because I believe foreign markets will continue to outperform the US at least for the next 24 to 36 months.
March 15th, 2008 at 9:25 pm
One more quick follow up & then I’ll leave you guys alone for awhile. lol. Another thesis I am following that is commodity related and am hearing lots of talk about is the Oil Services & Exploration sector. I keep hearing that the major integrated oil companies are going to dump a lot more money in the future into infrastructure build out. Two companies which I recently acquired should serve this thesis well. They are competitors but there respective charts look different. (WFT) Weatherford; & (BHI) Baker Hughes International. The other portion of the energy trade in my opinion you should look into is the coal players. Two companies that I have recently owned but sold due to big runnups are (ACI) Arch Coal & (JOYG) Joy Global. I am currently looking for an entry point back into Arch and Joy. There is an ETF that focuses on coal, I believe (KOL) is the ticker, it’s brand new, so I have shied away, and honestly, I think you would be better served to own the individual names. Just my two cents.
March 16th, 2008 at 5:05 pm
All great themes to play for the next year or so, at the least. A lot of your ideas are similar to those expoused by the folks over at Agora Financial. If you haven’t read any of their stuff, check it out. They are a newsletter advisory service, but also have some pretty intelligent write-ups they give away for free, such as the Five Minute Forecast and the Rude Awakening. They are big gold bugs and also into the commodities, infrastructure, and water plays you mentioned.
Some other ideas for your list are DJP, which is a commodities Exchange Traded Note, which invests both in energy and commodities. It spreads your exposure around and limits any one sector from growing bigger than 33%. Also, GMO, which is a moly play (don’t ask me to spell the whole name of the mineral!) is a good way to get some exposure to a metal that is used in a variety of applications, including energy (most notably nuclear reactors and oil pipeline transports).
I subscribe to your feed via Google Reader and enjoy the posts. Keep up the good work!
March 17th, 2008 at 4:38 pm
I won’t even begin to address what has happened in the financial markets the last 72 hours, but, remember what we talked about regarding the commodity trade. Well, folks A LOT of speculative money came out today. I told you to wait for a big pullback in commodities before participating and we are not there yet, but, a couple of more days like today and it’s time to start putting a long term position on. The DBA (Powershares DB Agriculture Fund) ETF that we discussed above was down about 6% today to close at 38.80. It traded under it’s 50dma. From a technical standpoint as we get close to 36 and approach the 200dma I will take a stab and open a 1/3 position. Long term this will be cheap. Nice to see some speculation coming out, think of it as a great buying opportunity. Please do your own dd before hopping on board.
March 17th, 2008 at 5:01 pm
Yup. We should see some good buying opportunities very soon.
If these financial institutions keep failing, SKF is going to be the best investment of the year!
good thing I didn’t listen to Ben Stein 5 months ago:
http://www.livingoffdividends.com/2007/11/14/ben-stein-long-on-financials/
The Fed’s getting ready to lower the rates tomorrow. Look for a rise in the price of gold.
March 18th, 2008 at 4:45 am
Carnival of Everything Finance – #15…
Carnival of Everything Finance – #15
Welcome to the March 17, 2008 edition of Carnival of Everything Finance.
We had over 110 really good articles submitted for this edition. Unfortunately I could not include all of them.
I hope you enjoy read…..
March 18th, 2008 at 8:46 am
Seeing as I have no exposure to gold at the moment, I think it may be time I started diversifying in that direction.. after a pullback of course..
Awesome post!
March 18th, 2008 at 6:50 pm
gold has a horrible long-term track record. If you want to time the market and buy some to play with, that would be fine, but it’s a horrible investment product for long-term investing. As soon as the market picks up again, it will tank.
March 18th, 2008 at 10:36 pm
gold is a hedge against the devaluation of a fiat currency.
its up 300% in the past few years. I don’t expect the dollar to recover any time soon, barring short-term spike and so gold should continue to rise over the next few years.
gold always maintains its value. for example, 1 ounce of will have always bought yo a very nice suite. Its as true today as it was 40 years ago.
however, look at the Dow between 1966 and 1995. If you adjust for inflation, your barely broke even after 30 years. check out this link:
http://bigpicture.typepad.com/comments/2007/04/inflation_adjus.html
don’t believe everything you hear in the popular media about stocks return 8.5% or 10% a year. all investments are cyclical. right now its gold’s time in the sun.
March 19th, 2008 at 12:26 am
[...] Income Investor presents Gold Breaks $1000/Oz: Investing For A Recession posted at LIVING OFF [...]
March 19th, 2008 at 7:12 am
That’s the one of the catalysts’ for my short position in gold livingoffdividends. One of my fundamental thesis’ for shorting gold is that it’s a very crowded on speculative trade right now. I was out to dinner the other night and overhead a few people at a large table talking about investing in gold for ‘growth’ as an investment. These were suit types, looking to ‘ride the wave’. I smiled to myself and thought we are close to the top. In markets, rule number one is that over time things ALWAYS revert back to the mean. I mean always. Gold has gotten ahead of itself. That’s the only part of your equation I disagree with. Gold always takes the stairs up & the elevator down. Don’t get caught on the elevator. I’m probably early, which is invesment terms in ‘WRONG’, but I’ll dollar cost average in and it’ll be a great long term return.
March 19th, 2008 at 12:19 pm
And so it has begun. The deleveraging & speculation on commoditites and gold is unwinding. Livingoffdividends where would enter on DBA (Ag ETF)? In doing some amateur technical analysis I may take a stab around the 34.50 area then see if I get an opportunity at 31.50 and lastly at 29.50 for an ultra EXTREME selloff. It had EXTREME volume today hitting a low of 36.80. Remember the high on this bad boy was 43.50 less than a month ago. It appears that hedges and speculators were leveraged to the hilt here riding it up in a market that had nowhere to hide and now it will take some time to unwind this, but, I still personally feel the demand story is there and real. It will provide an excellent opportunity to get long, especially if they overdue this thing do the downside, which, of course, Wall Street ALWAYS does. Thoughts anyone?
March 19th, 2008 at 5:18 pm
While its always tough to predict short-term term trends, i’ll make a stab at it.
it seems like the dollar is currently oversold and may experience a short-term rally. If this happens, we may see a drop in the price of all commodities, including gold & DBA.
I’d enter a 1/3rd position at this point and look to accumulate another 1/3rd over the next few weeks, on the back of a dollar rally. Of course, this is not advice, nor a surety that the dollar will rally or DBA will not collapse totally. (unlikely, but then so was the 97% drop in Bear Stearns’ (BSC) stock price in less than 10 trading days!)
It’s much easier to predict long term trends and that’s what I focus on.
March 20th, 2008 at 5:46 am
I really enjoyed your post. I’m a young guy, only a sophomore in college, and your blog has been one of the most valuable, applyable sources of information that I’ve found.
Thanks man.
-Daniel
March 21st, 2008 at 6:46 pm
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March 21st, 2008 at 6:51 pm
[...] OFF DIVIDENDS presents Gold Breaks $1000/Oz: Investing For A Recession posted at LIVING OFF DIVIDENDS, saying, “Why did gold break $1000/oz and what does it mean [...]
March 23rd, 2008 at 9:12 pm
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April 6th, 2008 at 1:18 pm
Great information. This blog is an excellent resource for the intermediate investor, keep it up!
http://www.boursactions.com
April 21st, 2008 at 10:22 pm
This is great information. I think JNJ is one of the best stocks there is for investing. I have read great things about it on so many sites. I plan to own many many shares of this computer in my lifetime.
May 15th, 2008 at 1:57 pm
I recently started a blog of my own about my experiences during my journey to becoming wealthy. I love this site! I will be writing a blog about it soon. I plan on trying a lot of the things you try or recommend. I have been greatly inspired by this site. Thank you for all the info.
June 27th, 2008 at 7:41 pm
Carnival of Making Real Money: 18th Edition April 1st, 2008…
Welcome to the April 1st, 2008 edition of the carnival of making real money. Well, we’ve had quite a rollercoaster ride over the last few weeks with elections, primaries, credit crises, seesaw markets… Our writers have come through this tim…
July 11th, 2008 at 7:54 am
good article including great information for the beginning investor !
keep it up
July 16th, 2008 at 5:32 pm
[...] http://livingoffdividends.com/2008/03/14…; [...]
November 6th, 2008 at 6:38 pm
Hi,
Just wondering what is your opinion on NWPX (and the industry in general). In your opinion will this still be a good investment – given the current state of economy and the word that there would be a cut-down in spending on infrastructure projects