Yesterday, gold plunged $44.50 on the June contract, ending the day at $566.80!
This is sending shock waves through the precious metals markets … scaring the pants off greenhorn investors … but making die-hard goldbugs smile from ear to ear.
Reason: They love it when gold explodes to the upside, confirming the power of its bull market … and they also love it when it falls back down to support, giving them a second, major buying opportunity.
That’s how Larry’s playing this market, and a lot of people have made fortunes following him in recent years. And I also see no change in the long-term trend.
Why This Is Happening and
Why It’s a Giant Whipsaw
The main reason precious metals (and other markets) are taking such a big hit is simple: Everyone’s spooked by inflation.
Strange. Inflation is actually bullish for gold.
So why are investors running away from gold when they should be running into gold, the world’s paramount inflation hedge?
Big mystery, eh? Actually, it does have a kind of upside-down logic. Because no matter how scared they might be about inflation, they’re even more scared about what Fed Chairman Ben Bernanke might do next to combat the inflation!
They’re more afraid of the cure than the disease. The fundamental problem with their upside-down theory is this:
We have no concrete evidence whatsoever that Bernanke is going to do diddly-squat to check inflation. So far, all we have is a bunch of talk.
Is he going to raise interest rates for the 17th time? You bet!
Will the 17th time be any different than the 16th and 15th, and the 14th? I doubt it. The earlier hikes did no more than make temporary dents in the gold bull market. Why should the next one be the magic bullet?
Look. The inflation data isn’t getting better! It’s getting worse. Last week, we received the May data on imports, and it stinks:
- Overall prices climbed 1.6%, twice as much as Wall Street’s forecast.
- The news was even worse for “non-fuel†import prices, a core inflation measure the market follows closely. They surged 0.7%, the most in any month since 2002 when the government started tracking the category.
- And several categories of import prices REALLY took off, including petroleum (+5.2%), consumer goods (+0.3%), and industrial supplies (+3.9%).
Plus, just yesterday, we received the Producer Price Index for May. On the surface, it looked OK: The headline PPI was up just 0.2% last month. That’s less than the 0.4% rise that many economists were expecting.
But if you dig down, you can see it’s NOT OK: The core rate of inflation, which excludes food and energy, jumped 0.3% in May, compared with just 0.1% in both March and April.
Today, the Consumer Price Index for May is coming out. A retrospective: Over the past 12 months, inflation at the wholesale level has risen by 5.6%. Excluding food and energy, the increase has been a more modest 1.5% increase.
Another big point: In Food Prices Starting to Soar, Larry tells you all about rising demand (and prices) for wheat, corn, and soy. The same goes for oil, metals, and other natural resources.
Yeah, I expect the Fed to huff and puff on inflation … that’s their job. But I don’t expect them to blow the whole house down. If anything, they’re going to want to puff it back up.
And don’t forget!!! The 2008 elections are nearing. Does Mr. Bernanke want to hike interest rates enough to kill the economy right before the next election cycle? Heck no!
Where Do the
Markets Go Next?
Regardless of what the Fed does, there are certainly overvalued stocks that deserve to be taken to the trash.
Most people think that’s terrible. The only thing they know how to do is run for the hills. But smarter investors see falling stocks as just another great opportunity.
They use reverse index funds — designed to profit every time the market falls. Like Rydex Ursa (RYURX) that Martin and Mike have been recommending.
Or they use put options, which give you even more leverage. We’ll tell you more about this tomorrow.
Meanwhile, this is bargain shopping time for natural resource stocks and funds. These are companies with real assets, and they are real values. If you take a longer-term view, and I do, it’s time to put your money to work.
For example, one fund that I think is a bargain right now is the US Global Funds Global Resources Fund (PSPFX). If you already own it, great. If not, wow! You’ve just arrived at a great time.
Good luck and good trades!
Sean
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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