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Tuesday, January 22nd, 2019 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

This Week’s Big Question: Has the Market Bottomed?

The big question this week is, “Has the market bottomed?”

It seems the answer is split right down the middle. People are telling you to buy and some are telling you to hold. While a lot of the chartists and technical traders are saying that the panic selling has yet to come, I disagree. It has already begun – especially on the junior exchanges where a lot risk has been taken off the table by the boat loads. It doesn’t mean the selling is over, but there certainly were opportunities to profit last week.

The market erased all of the gains made this year as of last Wednesday. Volatility is still here but the witching options expiry is over and we actually ended the week on a positive note. To me, this signals bull market support from traders and a positive note for the market. The volatility now rests more with the continued nuclear crisis in Japan, and tensions in the Middle East – which thus far has slowed down as Libya announced a ceasefire.

There are many ways to play the coming months and I remain completely bullish on the resource and commodities sector. Companies with dividends in the telecom and energy sector are looking good, but oil and gas is on the top of my radar, as are precious metals stocks.

Record earnings this year have pulled in some of the highest profit margins since 1993 for many of the oil and gas producers. That means most of these oil companies can not only sustain their current dividend levels, but also increase them if they choose – especially with oil above the $80 mark. Oil is over $100 right now which leaves a lot of room for error.

The worldwide demand for oil will decrease based on Japan’s recent disaster, but this is very short term. Without the nuclear power plants, it will have to turn to oil and gas – coal and other means will not nearly be enough. I would not be surprised to see oil test the $110 mark sometime this year.

While we may not fully be in the clear for this year’s bull market, we have taken a big step forward. Again, timing is everything but I added more stocks this past week because I think the bargains were there if you’re willing to hold for the next 4-6 months. I still think the overall markets will climb this year and end up in green territory moving into 2012, despite the panic-induced market behaviour.

But after that, I am not so sure.

While the markets may go up this year, the global economy is still shattered from 2008. Job numbers and earnings are improving but still nowhere near comfortable levels that warrant any major economic relief. That means the US government will more than likely step in again and pull more money out of thin air. The consequences of the printing press will undoubtedly unmask its ugly head within the next five years. The first layers have already begun peeling off.

We’re experiencing inflation. Prices of food, commodities, oil, gas, and everything have risen. In January 2010, China recorded an inflation rate of 1.5%. The rate of Chinese inflation is now 4.9% as of last month. Food and property prices in China are skyrocketing. On an annual basis, food in China has already increased 10.3% with grain climbing 15% and fruit up over 34% since the beginning of last year. Cotton prices worldwide is up over 170% in the last year and oil is once again above $100.

The US inflation rate is near a two-year high, growing another 0.5% in the last month. Those numbers are lot higher than what they print, given that food and energy prices have climbed at much higher rates. Still don’t believe inflation is here? You would be nuts to believe otherwise.

The Fed last week held interest rates at record lows of near 0 per cent and kept in place an unprecedented programme to buy up 600 billion dollars in government bonds, all while running the US runs its biggest deficit in history. The money supply continues to increase at the most astronomical rate EVER.

We’ve been keeping our eyes on the debt levels since December 2009 when the national debt level was just over $12 trillion. In January 2011, it reached $14 trillion. Only a few short months later, the number is now at $14,245,580,000. An increase of nearly $200 billion!

Heck, it’s not just the US. The average public debt ratio of advanced countries will exceed 100 percent of their gross domestic product this year for the first time since the last world war. The next five to ten years won’t be pretty.

While the Dollar will not completely collapse, as many extremists and columnists trying to make a name for himself are trying to make you believe, it will lose its buying power. The only things backing up the US dollar on a global scale now is the gold in Fort Knox and the amount of money the Country owes China. Cash is no longer king.

Two of the world’s most favored currencies, the Dollar and the Euro, are both losing their purchasing power on a worldwide level. The more money you have, the less its actually worth. The only way to beat inflation is by making bets that will show a greater return than inflation itself. And that won’t be easy given how fast inflation is already rising. This obviously spells dark times for Americans as high unemployment and climbing prices continue to hamper growth.

While the US takes full credit for the stock market’s rise by infusing the economy with limitless cash, it takes no responsibility for the rise in the cost of goods. So while the stock market may increase a percentage or two from the printing press, the cost of other things such as food and energy are rising at much faster rates.

Bernanke and the US government will tell you otherwise, but the proof is in the pudding. Inflation is not only here, but getting worse. The only safe haven that has beaten current inflationary pressures thus far has been precious metals. Imagine what will happen to precious metals, which have already soared on safe haven inflationary pressures, when Bernanke starts revealing the true inflation rates.

“I care not what puppet is placed on the throne of England to rule the Empire. The man who controls Britain’s money supply controls the British Empire and I control the British money supply.” – Nathan Rothschild (1777-1836)

The Gold Bull Run Isn’t Over

Whether you believe it or not, gold is valuable and fiat currencies are often pegged to the value of gold. In reality, the true value of gold does not change. What has changed is the decrease in value of the fiat currencies used to measure the gold price. That’s why gold has climbed the way it has.

There’s no doubt in my mind that we have yet to see the peak of the bubble in the gold and silver run. The factors supporting the rise of precious metals mentioned in our past issues of the Equedia Weekly Letter continues to ring true.

The inflationary crisis at hand has already caused the world’s fastest growing economy, China, to add more bullion to their vaults. Citizens continue to add precious metals to their bank accounts instead of cash. Given their actions in the the last two months, China is already on track to buy half of the world’s gold production. According to UBS, Chinese gold demand exceeded 7.05 million ounces in the first two months of 2011, which is equal to nearly 50% of all the gold produced in the same two months.

There are just so many reasons to support the climbing price of both gold and silver, regardless of China. But as an investor, that’s not what has me excited. Safe is great. But making big returns is better. Last year, gold stocks as a group did not perform nearly as well as the bullion itself. But this year, as I have mentioned before, it will change.

Gold stocks in general are cheap relative to bullion. The XAU Philadelphia Gold and Silver Index, consisting of 11 of the top traded gold and silver producers, trades at approximately 15% of the bullion price vs. a historical norm of well above 20%. Even if gold prices remain flat, which I don’t expect, gold stocks should outperform. Much like 2010, I expect the juniors to rage on and climb towards the latter part of the year and I expect the mid and large cap producers to slowly continue their climb after this volatility settles.

Investing, speculating, gambling – it really doesn’t matter what words you use to describe risking money. A bet is a bet. As someone who risks his money to make a return in the markets, I don’t invest by predicting major crisis events – such as the recent quake in Japan. You can’t predict those things. I invest based on market fundamentals and speculate on anticipated market perceptions both in the short and long term. Perception is reality and there is conformity amongst both fear and greed. That will never change.

So absent of any major oil shock or disastrous world event, the market should perform well over the course of the year because people need to beat the rate of inflation just to survive. The US government will continue to add more money into the system which will help the stock market climb, but in its attempt, it will cause prices to rise. This in turn will force investors to make riskier bets in the market to beat inflation, and thus forcing the market higher.

Six months from now, I believe that many of the big name gold and silver producers will climb, along with junior precious metals stocks with strong fundamentals. On the otherhand, if you think we’re going to have another 2008 style crash, gold stocks will undoubtedly get hurt. But like before, the stage would be set for some incredible returns. I expect that many gold and silver stocks (both juniors and majors) will come back and break out to new highs over the course of the next few years – probably sooner.

I took a lot of profits off the table in February and early March, but much of that is slowly moving back into the market. This week will be interesting, but I don’t think it will be as volatile as the last. A lot of newsletter writers, chartists, and technical traders believe the markets are continuing sharply down. I would not be surprised to see the week end up higher.

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