Now that we’ve had a correction in gold, will the metal’s rally resume? My own view is that the current bounce should be viewed with suspicion. The reasons: the US economy, as anticipated, is stronger than expected. That means the Fed will keep hiking interest rates, which makes holding bullion more expensive. I expect the yellow metal to stay on the defensive and make a low around May, after which its long term advance will continue. What does that mean for investors? Maintain your core holdings in quality gold mining shares, but wait with initiating new trading positions.
Why are energy stocks rebounding as fundamentals deteriorate? The answer, very simply, is geopolitics. Yes, alarmingly high US oil and natural gas inventories are being noticed, but increasingly many market participants ask themselves how long supplies can stay plentiful. The US, Japan and the emerging economies keep surprising on the positive side, and even in Europe there are patches of economic strength-all of which suggests rising energy demand should soon mop up excess inventories. And on the supply side, things look terribly uncertain. Iraq still pumps less oil than before Saddam fell; the Gulf kingdoms are unable to raise production in a meaningful way; operating in Nigeria is becoming increasingly dangerous for the global oil giants; Venezuela seems eager to seek a confrontation with the US; and Iran is in the midst of a showdown with the West that could result in a curtailment of supplies from the country or, worse, threaten main oil shipping routes. What to do in this situation? I have the same advice as I do with gold: energy is in a long term bull market, which is why I’d stick with core positions in top quality oil and natural gas producers. As to additional trading positions, I’d take advantage of any major setbacks.
The dollar will continue to trade on the strong side, but some analysts are starting to focus on the latter part of this year. I’m among them. I believe the greenback will enter a period of profound weakness in the second half of the year, when the Fed’s rate tightening cycle is ends. Likely shelter against a severe dollar decline: the Chinese Yuan, the Japanese Yen, the commodity currencies and gold. In chronically volatile currency markets, the challenge will be to initiate such positions at the right time.
With yields on short and intermediate term bonds racing higher, are US bonds finally a steal? While I like today’s yields a lot better than the meager offerings available a year ago, I’d still tread cautiously. The US economy still has a lot of steam and America’s fiscal position is deeply disquieting. Moreover, foreign investors may soon have to worry about a falling dollar, which could dampen their interest in US debt. I’d stick to 5-year corporate issues of high quality, which yield around 5%. That’s as much as their 10-year or even 30-year counterparts!
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!