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The markets continue to be in a great mood; the S&P 500 is at record highs and the Dow is flirting with the same. You have likely heard many boasting the end of Bitcoin this week as a major Bitcoin exchange, Mt. Gox, filed for bankruptcy. In all, Bitcoin owners storing their currency at Mt. Gox lost more than $400 million worth of the digital currency. As bad as this sounds, we believe this will actually serve to strengthen the currency as we detail in "Bitcoin On The Brink." In addition, we believe there is potentially much more to Bitcoin than simply being an online currency, as detailed in "What If Bitcoin Is More Than Bitcoin?". It is likely that these events will led to greater regulation for Bitcoin, at least in the U.S. This will cause angst in early adopters who love the currency for the fact that it has no government regulating body overseeing it. On the other hand, later adopters who see the value of Bitcoin more as a means to avoid exchange and transaction fees will welcome the regulation as a means of stabilizing the currency.
After what seemed to be a major victory last week in Ukraine with the ouster of President Viktor Yanukovych, potentially greater problems have ensued. First, the country is on the brink of bankruptcy and Western nations are in no hurry to help. Second and more urgently, camouflaged gunmen arrived on the scene in an eastern region of Ukraine known as Crimea. The seemingly obvious conclusion is that these gunmen, now controlling access to the region's parliament, airports, and regional television, are there thanks to Russia, but the Kremlin is denying involvement. Whether that is true or not, Russia is flexing its muscles in the form of increased levels of military exercises on the border with Ukraine. It is clear that Russian President Vladimir Putin is not taking kindly to the possibility of "losing" Ukraine to the West.
The Chinese currency, the yuan or renminbi, faced a sharp decline this week as a direct result of actions by their central bank. The drop was the biggest since 2005. Weakening their currency will help China with exports because they become cheaper to other countries. There continues to be plenty of reasons for concern in China due to high debt levels on the regional and city level. What happens next and what the Chinese central bank has in mind is very much TBD.
Federal Reserve Chair Janet Yellen testified before the Senate Banking Committee saying the Fed plans to say on track with current bond purchasing (think "QE" or "money printing") and keep interest rates low, likely into 2015. News like this always gets investors excited.
One of our wager picks, J. C. Penney (NYSE:JCP), reported earnings this week and investors were so pleased that they sent the stock soaring 25% in a single day. The price is still below where it was when we mentioned it at the beginning of the year, but fears of bankruptcy have greatly decreased and that is what was really worth watching. We expect JCP to rise another 25% to $10 relatively soon.
What does all of this mean for the investor? A look at the stock market this week is enough to put any investor in a great mood. Americans still have lots of cash waiting to be invested and many of them are eager to jump into a hot market. The Fed seems intent on continuing with QE and keeping interest rates low -- both great news for stocks.
On the other hand, globally there are ample issues. Do these matter from an investing perspective? In the near-term they will likely help the U.S. markets because people will see the U.S. as the best and safest place to put their money. What if one of the struggling emerging market countries implodes? Most of them are small enough that the global economic impact would likely be minimal. Even Ukraine? Yes, even Ukraine. The biggest issue of concern with Ukraine is actually not Ukraine itself, but the growing tensions between Russia and the West. The possibility of issues in Ukraine trigger a much larger conflict -- and this is what we are keeping our eyes on. In the end, markets are high now and another pullback, likely of 10% or more, should not be a surprise. Either way, U.S. stocks should continue strong for some time still.
In some other site related news, we have updated some of our Money Saving Tip articles, adding tips on how to" Write Your Own Will" and "Start An LLC" for your small business. We would like to draw attention to our Contrarian Crazy section, especially for those interested in buying or starting a small business. We have begun creating an Investing Glossary to help better educate our readers. This allows us to link keywords back to articles that offer definition and discussion of important investing words and phrases. If you want to find a particular article in the Investing Glossary without a direct link to it, we recommend using the search feature on the home page. Finally, we offered some warning to new investors regarding the danger of Penny Stocks.
The Russell 2000 gained 18 points to 1183.03.
Gold closed at $1328.60/oz and Silver at $21.23/oz, with gold up slightly and silver down a bit on the week. Many people are beginning to get excited about gold and silver again, believing that a turnaround has begun, but we are not so sure yet. We are still looking for one more big fall in price before turning course and having a big, extended rally. Why? Typically, when an asset like gold and silver have a big rally like they both did from 2000 to 2011, there is a big pullback in price followed by a huge rally. The pullback normally isn't finished until it falls to a point that most people begin giving up on the asset. We think it will take one more drop, perhaps even gold declining to $1000, for this to happen. Where does gold go from there? If this chart is accurate and history repeats itself, we could see gold reach $20,000+. If this anticipated pullback takes place, we plan to resume the purchase of physical gold and silver as well as begin buying stock in mining companies. If you own no physical gold or silver, we consider the current prices to be a very good entry point for long-term investment. For information on how to buy gold and silver, please see "How To Buy Gold And Silver."
Bitcoin is sitting at around $576.86, holding pretty steady for the week. Bitcoin has been getting beaten up pretty badly for the failure and announced bankruptcy of Mt. Gox of Japan. We actually see this as a good thing for Bitcoin, please see "Bitcoin On The Brink" for more. If you have been considering buying Bitcoin, these are some of the lowest prices we have seen since the dramatic price jumps in December of last year. It is possible to buy small fractional amounts of Bitcoin for less than $20. Caution and small amounts of money are prudent because however things unfold from here, we continue with our view that owning Bitcoin should be equated with buying a lottery ticket. If it becomes "established," it could skyrocket from here, but it could also fail to catch on and crash to $0. For information on how to buy Bitcoin as well as our views on investing in it, please see our article, "How To Buy Bitcoin." For a brief history of Bitcoin, see Market and Meaning 1/31/14.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JCP over the next 72 hours.
Additional disclosure: We own gold and silver coins and bars as well as some Bitcoin.