SILVER

I’ve been writing a lot about gold, but what about its precious cousin, silver? I think one of the most critical positives for the white metal will be the introduction of “Silver iShares”, an exchange traded fund or ETF. Unfortunately, the new vehicle may not be listed until late this year. That means the expected impact on demand of 100 plus million ounces a year may only occur in 2007. As long term Perspectives readers know, I believe the market always discounts all known and some unknown facts. Hence, the 2005 gain in silver bullion to nearly $12 may already reflect the advent of an ETF. Still, I anticipate further gains in the price of the white metal through the next two to three years. How to participate in the silver rally is more problematic, because most pure silver mining companies trade at very high multiples. That makes me believe that bullion is the more prudent alternative.

US STOCKS

How can the stock market stagnate while economic growth is buoyant? This question comes from a reader’s response to my recent summation of the S&P500’s miserable performance during the past few years. The odds that subpar performance will continue are strong, partly because the economy experiences robust growth. The solid economic pace means that the Fed feels less compelled to perpetuate the unprecedented liquidity conditions of the past half decade and will instead keep driving up the cost of capital. In addition to higher interest rates, corporations also have to cope with rising commodity prices and a serious acceleration in labor costs. (On average, wage expenditures amount to 70% of total costs!) Naturally, a strong economy will also boost sales volumes, but I still believe that profit growth will turn negative and cause ongoing stock market strains. The 2000s could shape up to be the worst decade for the stock market since the 1930s. In that notorious era, the S&P500 returned an average of 5.6% a year, considerably more than the 0.6% recorded so far this decade.

CANADIAN DOLLAR

The Canadian dollar’s rally to US$0.88 and its subsequent drop illustrate two opposing forces. As longer term Perspectives readers know, I’ve for the past three years predicted a steadily rising Canadian dollar. Why? Mainly because relative to the US, Canada looks like nirvana. It boosts a huge current account surplus, sports one of the highest GDP growth rates in the G7 and is a large producer of raw materials at a time when supplies are fickle and demand is exploding. The flip-side is that Canada is a meaningful exporter of finished goods to the US, which means that each advance in its currency cuts into employment. In the past year, factory payrolls north of the US-Canadian border plunged more than 6%, compared to a drop of less than a tenth of that in America. That, in turn, has caused Canada’s currency to retreat to US$0.86. Still, I stick by my prediction that by the end of this decade the Canadian dollar will exceed the value of its US counterpart. In my opinion, the benefits to Canada as the world’s most stable commodity exporter far surpass the disadvantage of manageable negative growth in manufacturing. In short: buy the Canuck buck on significant setbacks!


Peter Cavelti’s background as a financial analyst and author spans 35 years and four continents. His grasp of global issues is extraordinary and his comments and books have been published internationally. He was president of Canada’s Guardian Trust and subsequently owned his own firm, which managed some of the best-performing natural resource mutual funds. Peter firmly believes that only an integrated understanding of geopolitical, demographic and economic events can lead to successful investing, and that is what his web service Perspectives is about. If you feel keeping on top of relevant global events takes too much time, Perspectives is for you. Whether it’s investment advice or political analysis, Peter offers his insights in concise and easy-to-read form. Best of all, Perspectives is free. Visit www.cavelti.com and sign up today!