We’ve been flooded with questions about the impact of the elections — and of the Fed’s plans to restart the money printing presses — on gold, silver, the dollar and other investments. So I have asked Monty Agarwal, who’s calling the shots on my own $1,000,000 portfolio, to give you his best answers … — Martin |
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The upcoming midterm elections have now shifted more decisively toward Republicans, and polling analysts from both parties agree about that trend.
Plus, the Fed has now virtually declared that it will plow ahead with another round of quantitative easing (QE2).
That clarity makes it easier to address many of your questions — and below are my best answers …
Q. This week, the Wall Street Journal threw cold water on the market’s expectations regarding QE2. One Fed president called it “The Pact With the Devil.” What do you think?
A. The fundamental impact of money printing is indisputable — it’s long-term bearish for the dollar and long-term bullish for gold. But temporarily, a lot of these expectations are already baked into the market. So when the Fed announcement comes out next Tuesday, it could be anticlimactic. Based on the old adage “buy the rumor, sell the news” you could see profit taking and corrections.
Q. You talk a lot about diversification. But so does everyone else. What makes your diversification different?
A. Three key differences:
First, I diversify across ALL FIVE asset classes — (1) stocks, (2) bonds, (3) precious metals, (4) energy and other commodities, (5) plus currencies (Most others diversify strictly within the asset class “stocks”).
Second, I diversify WITHIN each asset class — as I explained in the previous question about precious metals (Many others just get stuck trading one instrument for each asset class).
Third, I diversify dynamically, depending on the strength of the signals from the Foundation for the Study of Cycles, and my own trading experience.
Q. Isn’t there a danger of another bubble burst — the gold bubble?
A. A sharp gold correction? Yes! A bubble that’s ready to burst? Not for a long time! Gold is still a long way from its inflation-adjusted all-time high, and the long-term cycles are still pointing higher for another couple of years. In the future, however, a bubble is certainly possible.
Q. How do I get more data on the track record of the Foundation for the Study of Cycles?
A. They have compiled that data in great detail and submitted to me for my due diligence:
* For my analysis of their data in each asset class, click here.
* To review the data they submitted to me, click here.
Q. Why do you leave out real estate from your five asset classes? Isn’t that also an important asset class?
A. It is. And someday if I see a viable ETF that’s linked to the ups and downs of median home prices, I might consider that to diversify into a SIXTH asset class. But right now there are no investments available that correlate to real estate values.
Q. Given the political landscape we are facing in the future, what percentage of my portfolio should be held in gold and silver?
A. I can’t say because that depends on your personal profit goals and risk tolerance. But I CAN tell you want I’m doing with Martin’s $1,000,000 right now. First, he has about $50,000 in a gold ETF. That’s a modest 5% long-term core position. Second, I’m waiting for a correction to add substantially more. As I said in response to another question, China surprised the market and jacked up interest rates this week. That’s the type of thing that can give me the window I was looking for. If not, the market’s response to the elections could deliver a second buying opportunity.
Q. If gold hits $1,500 this year, what can we expect for gold miners and junior gold miners? Is there some incremental factor that we can expect?
A. Yes. Most senior mining shares give you more profit potential than bullion, and most juniors give you more potential than seniors. But that’s a double-edged sword. It also means they can fall in value faster. Right now, my focus is on the metals themselves, via ETFs.
Q. Is war a threat to the price of gold and commodities? Do you see a war in our future?
A. In the future? Heck! The U.S. alone is ALREADY waging hot wars in Iraq, Afghanistan and Pakistan, while pursuing cold wars against Iran and North Korea. We have major territorial disputes in the China Sea and other regions. Plus, we have ALL of the largest countries of the world knee deep in CURRENCY wars. Although I don’t foresee a conflict ahead like World War I or II, I do see continued escalation on most of these fronts — very bullish for gold and probably for most commodities as well.
Q. In order of importance, what are the top five factors that you think will drive the price of gold upward in the months ahead?
A. It could change in the months ahead, but right now the top five factors are …
- Weakening U.S. dollar
- Currency wars (all currencies being debased)
- Anticipation of more quantitative easing
- Sovereign debt default concerns
- Worsening global instability
Q. How does China and India buying gold affect the market?
A. Both can have a big impact, and India is a large player in the gold market, especially during the Indian wedding season when demand for physical gold increases substantially.
Q. Because of its heavy industrial use, is platinum more vulnerable than gold to a soon-to-arrive economic downturn?
A. Yes, to some degree. But the fact is no investment is completely insulated from economic contraction, which is precisely why you should (a) diversify across all FIVE asset classes and (b) also take advantage of opportunities to profit from markets moving in TWO directions — up or down.
That gives you TEN different types of market environments to profit from. In practice, though, unless conditions change very substantially, there are some markets I would not favor playing on the downside, such as gold. Instead, we generally see declines in gold as BUYING opportunities.
Q. What the Foundation for the Study of Cycles is saying sounds very similar to Bob Prechter’s Elliot Wave Theory. Do they agree with Prechter that the market is entering a major wave down?
A. The Foundation believes the U.S. stock market averages have been in a major down wave since 2000 and will continue in that mode until 2012.
Q. How does stimulus impact the timing of the cycles?
A. It may alter somewhat the timing of the turns, but we have yet to see a case in which it has changed the course of cycles. Often, the cure for economic malaise is worse than the disease. If anything, therefore, the stimulus can make the ensuing down cycle even more pronounced.
Q. Does the Foundation for the Study of Cycles issue buy/sell signals? If not, it seems we could really get hammered even being on the right side longer term.
A. Yes. The Foundation gives me long-term buy/sell signals, and from my own work, I generate short-term signals as well. To reap the potential of both, I have split Martin’s $1,000,000 into two parts — a core portfolio to stick tenaciously to the Foundation’s long-term cycles plus a dynamic portfolio to trade the markets with greater flexibility in the shorter term. If you do something similar, I think it can give you the best of both worlds.
Q. Are muni bond prices tied closely to Treasuries?
A. In general, yes. But they are also exposed to the financial risks of the specific local governments that issue them. I prefer to focus on the big-picture trend. If the Foundation’s long-term cycle is pointing toward rising bond prices, we can buy ETFs that are especially designed to profit from rising bonds. If the signal is pointing down, we can do the same with an inverse bond ETF. If you do something similar, it can give you far more flexibility and profit potential than just buying and holding a portfolio of bonds that could be exposed to the risk of a downgrade or even default. Plus, with many of these ETFs, you can also earn a yield, although, as you know, yields are too low to make a fuss over at this stage in the cycle.
Q. With all these paper dollars in circulation, why wouldn’t inflation be on the horizon in a big way?
A. It is. But think of it as pent-up inflation. Right now, you don’t see it because the economy is down. But in the future, when conditions are right, the inflation can burst into full view, much as it did so many times in history when governments trashed their currencies. Also, recognize that certain sectors of the population, such as retirees, are really getting the raw end of the stick — nonstop increases in the cost of food and medicine … but ZERO increases in their Social Security checks for two consecutive years.
Q. How can we take advantage of what’s taking place in Japan with the yen?
A. Japan is ideal for what I like to do for two reasons: First, the moves in the yen can be huge — driven by massive flights of capital to Asia. Second, there are ETFs available that help you profit from your choice of a rising yen and a FALLING yen. I will probably use the former when I think the time is right.
Q. Which currencies will die and which ones will survive the coming currency wars?
A. I don’t think any major currency will die. But nearly all WILL suffer severe wounds. The reason is that right now, major governments are scrambling to push down — or at least HOLD down — the value of their currencies in a bid to stay competitive. You’d think countries would want their currencies to be strong. But the reality nowadays is that the cheaper their currencies, the cheaper the product they sell in the global markets and the more they can export. In the end, the only true winner in currency wars is gold and other investments that typically rise when paper money falls.
Q. If we have austerity, will the dollar go up?
A. If the government enacts austerity programs it may be viewed as bullish for the dollar. But it’s likely that the Fed would act aggressively to counteract austerity measures, printing more dollars and driving the greenback’s value back down. Meanwhile, longer term, the dollar still faces significant challenges, with long-term cycles continuing to point to a low in 2012.
Q. Please explain the relationship of interest rates to the value of a country’s currency. For example, recently Japan reduced their interest rate to “zero," yet the Japanese yen seems to have risen against the U.S. dollar. I would have thought the dollar would look a bit better after Japan’s action.
A. You’re right — as a rule, higher interest rates attack more investors and boost the value of the currency, while lower interest rates have the opposite effect. But with Japan’s interest rates already close to zero, that rule is far less meaningful. This merely highlights the powerlessness of governments to control events. In this case, even though the Japanese government was trying to push the value of the yen down, it was overwhelmed by dollars flooding into Asia in fear of massive money printing by the Fed.
Q. What is the implication of the cycle research on investments in China and Asia?
A. For several decades, the Foundation has been predicting a major, long-term shift in economic and political power from the West to the East, particularly from the U.S. to China. That shift is now accelerating and should reach a near-term climax in 2012.
Q. How do we protect ourselves against a falling or crashing dollar?
A. The dollar’s decline is very unfortunate. But fortunately, there are many investments that tend to rise as the dollar falls. The most obvious direct opportunity is in key foreign currencies since they rise in tandem with the dollar’s decline. And right now, in Martin’s $1,000,000 portfolio, I am trading the Australian dollar through ETFs, using temporary dips as buying opportunities.
Other major opportunities are in precious metals and agricultural commodities. With each of these, it’s critical that you avoid CHASING THE MARKET. Let the market come to you. It may not do so exactly when you want it to. But it always will.
Q. Because of the historical relationship between gold and oil, why not invest in oil instead of gold?
A. Oil is subject to varying levels of economic activity and can decline when economies decline. Gold is a purer play on inflation and currency debasement. The Foundation’s forecast for oil is also far less bullish than on gold. Reason: Oil demand is likely to decline in the wake of a continuing or deepening U.S. recession.
Q. Is cash still king or should we be primarily in hard assets such as gold, oil, sugar, etc.
A. You should always hold SOME cash for liquidity and investment opportunities. And if you are a conservative investor, you can hold a lot more. But right now, it would be a stretch to say cash is king. It has ceded its throne — at least temporarily — to investments that rise as the dollar falls.
Q. Do you use futures or options in Martin’s $1,000,000 portfolio?
A. No. But I may sometimes use double-leveraged ETFs — ETFs that are designed to appreciate 20% for each 10% move in the index or assets they are tied to.
Q. Thanks so much for this great presentation! Do you feel we will soon see rioting in the U.S. similar to that in Europe?
A. Increasing social instability is a slower process in the U.S., playing itself out over a period of time. Although it’s possible that it could reach a crescendo and spill out onto the streets in the years ahead, I do not anticipate that happening in a big way in the near future.
Q. Shouldn’t all of my investments be in India, Brazil and China instead of the U.S.?
A. Some? Yes! All, no!
Q. Could you comment on the announcement of mortgage foreclosures being suspended by JP Morgan as they can’t prove they have the mortgage note for the original mortgage for millions of Americans?
A. The foreclosure fraud crisis will no doubt prolong the mortgage mess. For more on this subject, see Martin’s comments in “Flash update: Mortgage mayhem spreading!”
Q. What is causing the disconnect between the down economy and the up market?
A. Primarily the prospects for QE2, or more quantitative easing. Temporarily, that’s propping up the stock market despite the underlying weak economy. But in the final analysis, stocks will rise or fall with corporate earnings. Fundamentally speaking, only contra-dollar assets like gold, foreign currencies and commodities benefit from the Fed’s money printing.
Q. The full effect of the 1929 crash was not felt for two or three years. Are we in for a big surprise in 2011 or 2012?
A. In many respects, yes. The economy is still on life support, and the government has run up tremendous deficits. The Foundation sees a protracted tug of war between government stimulus and economic contraction over the next two years, with the economic contraction emerging as the prevailing trend in 2011 and 2012.
Q. What is the likelihood of QE2?
A. Extremely high. The Fed has made it abundantly clear that it intends to print more money to stave off deflation and induce spending. Moreover, an announcement is expected on November 3rd. As you saw from my answer to the first question, however, don’t be surprised, if the markets initially move in precisely the opposite direction from what most people are anticipating. If they do, they could open up a whole new series of trading opportunities.
Thank you for your very insightful and relevant, questions! I think they cover most of the current topics very nicely!
Best wishes,
Monty Agarwal
