Now that the presidential election is over we can hopefully look forward to some respite from the perpetual bombardment dished out by both the Republican and the Democratic Party machines. President Obama has been re-elected so we can expect four more years of a Washington-centric controlled economy with a rolling program of borrow, print, spend and pretend; similar to the last four years. The so-called fiscal cliff will not be met head on, the approach will be one of extending some of the tax cuts now in place and a watered down strategy of fiscal prudence. Budget ceilings will come and go and the deficit will grow ever larger as the economic recovery will be considered far too fragile for any serious attempts at financial reform. All in all nothing has really changed, the slow motion train crash will continue and the fallout will affect everyone
One of the casualties will be the dollar as quantitative easing will be applied in ever increasing doses, devaluing the dollar's worth and its buying power. However the race to the bottom is alive and well as other nations will adopt similar strategies in an attempt to remain competitive and so Act Two reads like Act One.
The chart below shows the 50dma crossing over the 200dma in a downward motion, which is sometimes referred to as the 'cross of death' as it usually signals that a negative move is upon us. We now expect the dollar to drift lower and test the '72' level on the U.S. dollar Index.
The demise of the dollar and other fiat currencies brings with it an increase in the price of hard assets. Over the last decade or so, our hard asset of choice has been the precious metals sector, mainly physical gold and silver and they have served us well. Individual investors have their own unique preferences, some preferring land, property, fine art, other commodities, etc. As we don't have any expertise in those areas of investment, we will leave them for others to comment upon.
The chart below shows that gold prices have been through a lengthy period of consolidation following an all-time high formed in 2011. We draw your attention to the 50dma which has crossed over the 200dma in an upward motion which is sometimes referred to as the golden cross. Also note that gold returned from its recent high to take tea with the 200dma, which is a real good starting point for its next rally. The technical indicators are turning up from a low level and the MACD looks likely to form its own crossover suggesting that gold prices are about to move higher.
Our own opinion is that gold and silver will rally from this point through to the early part of next year, making now a good time to accumulate more of the physical metals. Once above the $1800.00/oz level, gold will be well positioned to make a run at a new all-time high. We also expect silver prices to catch the wind and move to much higher ground. The gold to silver ratio currently stands at 54, if this ratio were to contract, as we suspect it will, then silver prices could well and truly explode, just as it has done in the past. So stepping out and acquiring a few more ounces of silver should also serve you well.
Alternatively, investing in a small selection of good quality gold producers is the preference of many investors and indeed we were buyers of such stocks in the early years of this bull market. At the moment we are not enthusiastic about them as they appear to lack the ability to keep pace with gold as evidenced by the HUI (the gold bugs index of UN-hedged gold producers) which is trading at a disappointing 485.56. Please don't be put off by us though, as many of our peers see the mining sector as a good buying opportunity at these levels.
As speculators we look for a 'leverage' return when placing a trade and so our attention is focused on the options sector. If we are correct in our premise that both gold and silver are going higher, then a few well-thought out option trades should provide our portfolio with a real boost. Well that's our plan and we are sticking to it, as they say. You will need a strong stomach as the oscillations can be a tad nerve wracking and you will also need the discipline to close trades on a frequent basis as options are not a 'buy and hold' for the long-term vehicle. Time is of the essence, with most options expiring worthless.
Finally, move out of the folding stuff as and when you can and acquire some hard assets in a sector that you are comfortable with. Be prepared to work your socks off as none of this is going to be easy, it is going to be a white knuckle ride with violent oscillations being the order of the day. If you can find the time to do your own 'due diligence' then you should survive and even prosper in the coming years, so please give your own financial situation the attention it deserves.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: We make no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level or risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is not a guide nor guarantee of future success.