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The markets ended the week down again as the 2014 malaise continues. The market continues to strain under the weight of all-time highs, but the momentum of the bull has proven a formidable foe. China continues to careful lay foundations for bold currency moves as Russia and Ukraine continue their dangerous dance. In some ways, this has been a low-key and profound week all at the same time.
Wall Street gossip was kindled this week over news of seemingly blatant insider trading violations committed by well-known, billionaire investor William Ackman. Most likely, you don't know his name and you really have no need to. The main take away from the incident is that greed often wins out over ethics and laws have no meaning when not enforced. It's impossible to walk down Wall Street and not be tempted with greed, but greed always has consequences. You don't want to be on the wrong side of that equation. An important value of this newsletter is that money and wealth contribute to life but they are not life themselves. May we all be marked instead by the worst nightmare of greed, generosity. Enough preaching for the week...
We continue to keep our radar up for signs of stress and concern in the market. Our expectation remains that the stock market will continue rise to much higher levels before we experience another, perhaps greater crash than in 2009. That said, we have no crystal ball regarding the specifics of these events or their timing. As signs of stress grow greater and greater, we intend to grow more and more defensive with our investing. One warning sign at present is the seeming paradox of companies with huge levels of cash that continue to borrow more and more money thanks to record low interest rates. Even more troublesome is that all this money is largely being used to pay dividends, buyback stock, and fuel mergers as opposed to being reinvested in the company itself. At some point, record levels of cash and rapidly rising levels of debt will become unsustainable and that will be a dose of sobriety the stock market will likely take very poorly.
Public companies continue to report earnings for the first quarter of 2014 (January-March). This week Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Facebook (NASDAQ:FB) all reported. AAPL and FB both blew the roof off the house with better than expected results. Apple announced a 7-1 stock split which means that everyone's stocks will be divided by seven. If you had one, soon you'll have seven. AMZN was not the bearer of good news, their ambitious expansion continues to interfere with profits and stock holders are beginning to grow tired of the seemingly infinite wait for profitability.
We continue to track events in Ukraine. The lull of "no news" creates the risk of forgetting the danger of an increasingly aggressive Russia. An escalated confrontation or Russian invasion could be the trigger for a large market sell-off and heightened global instability.
What does all of this mean for the investor? Don't be driven by greed and don't be fooled by "no news." There are notable threats brewing in corporate America, the stock market, China, and Russia. At the same time, markets are high and for most of us, life is good. Give thanks for your blessings and at the same time don't forget there are real bad guys in the world. Have a great week and don't forget to bless someone with your generosity.
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Gold (NYSEARCA:GLD) closed at $1303.80/oz and Silver (NYSEARCA:SLV) at $19.73/oz. with both up a bit for the week. Last week we mentioned a recent gold report regarding the Chinese gold market. In six years the Chinese demand for physical gold for investment has grown nearly six-fold. The investment demand for gold in China was 408 tonnes in 2013 versus 67 tonnes in the U.S. and 265 tonnes for all of Europe in 2013.
This is notable for a few reasons. Right now the U.S. Dollar is the reserve currency of the world, this basically means that all international trading uses dollars. This fact gives the dollar preeminent status around the world, but that title is beginning to show some cracks. The U.S. economy is still the strongest in the world, but faith in the U.S. maintaining that title is waning. After all, all that gives the dollar value is faith in the U.S. government.
Historically gold has been what has given currencies their value. Some say that China could be building up their gold reserves to make a move toward having a gold-backed currency. Time will tell whether that is true or not. In a world where almost every major central bank is devaluing their currency through money printing, a move by China to fortify their currency with gold could change the world economic landscape in their favor. This is one of many reasons we aim to have somewhere between 10-20% of our portfolio in physical gold and silver as a strong layer of insurance against the collapse or reshuffling of an increasingly fragile world monetary system.
Our opinion on gold and silver is unchanged. As we have said for weeks, we are still looking for one more big drop, perhaps even gold declining to $1000 and silver as far as $16 before a longer term rally begins. We are waiting for these price drops before we buy anymore gold or silver. Our general time frame is May/June, but that is being held rather loosely. That said, if we did not own any physical gold or silver, we would consider the current prices to be a very good entry point for long-term investment. It is important to reiterate that we are talking about owning physical gold and silver coins and bars, not stocks or ETFs. For information on how to buy gold and silver, please see "How To Buy Gold And Silver."
Bitcoin is sitting at around $461.40, down around $50 from last weekend. The price dropped this week when the Chinese government cracked down further on the use of Bitcoin. This is where our commentary on gold mixes with that of Bitcoin. China appears to be making clear moves to protect and strengthen their currency, from buying huge quantities of gold to fearing the idea of Bitcoin gaining greater market share. These are not to be alarmist comments, but worthy of note.
We are officially buyers of Bitcoin when at or around $500 and especially when closer to $400. The Bitcoin price chartshows that prices are currently toward the bottom end of the price range. We intend to have Bitcoin make up approximately 1-2% of our overall portfolio of investment so when prices drop like they currently have we spend more "lottery money" on Bitcoin, buying some fractional amounts. 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. 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."
Disclosure: I am long AAPL, FB.
Additional disclosure: We also own gold and silver coins and bars as well as some Bitcoin.