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Happy New Year 1/5/11

Here we are a couple of days into the New Year and gold and sliver have experienced some profit taking [not expected to take place so soon in January] and interest rates [10 and 30 yr] are slowly continuing to rise. As predicted, the volatility in the bond market is also steadily increasing.

So how do we make money this year??

The long term outlook for inflation to rise [world-wide] hasn't changed. China, India,UK, European Zone,Brazil etc are all seeing inflation increase beyond their targets. While we haven't seen a significant increase yet [based upon the "official" numbers] in the US, rest assured it is coming.

It's very telling to see "main line" people and firms warning about an increase in inflation. Warren Buffet [he just switched about 1.5 billion dollars worth of floating rate debt to a fixed rate], Bill Gross [PIMCO], Money Magazine, Barrons etc. are among a growing list of gurus that are very bearish on US Treasuries. I think it's worth noting that some of these pundits made this call BEFORE the recent bond market sell off. It's also very telling that not many of the experts who are bearish on the bond market are recommending that people short the market. 

Actually, you don't need a PHD in Economics to figure this one out. The US and the rest of the developed world is going to do what it takes to stoke economic growth -----period. Our own fed says it wants INFLATION TO INCREASE, it wants the stock market to go up, and it will do whatever it takes to reduce unemployment. What ever it takes means----PRINT MONEY. 

Then when you take a look at the fiscal situation here in the US the best word I can use to describe it is ABSURD. Trillion dollar deficits as far as the eye can see and nobody wants to accept any cuts to benefits they receive from the government. Are you ready for street riots [ala Greece,France,UK etc] here in America? The US is already at the point of no return with regard to fiscal insolvency ---it's just that the US and the rest of the world are not ready to accept this. Do you remember what happened to the French when they buried their heads in the Maginot Line in 1940?

How about the eurozone? Greece,Ireland,Spain,Portugal,Italy ---need I say more?
The only solution is some kind of default either through "hair cuts" for the debt holders or through devaluing the debt through inflation.

So what's going to happen??

The short term effects from rising inflation [as I said before] can be quite positive. The equity markets should do well, economic growth will start to accelerate, even the dollar could rise for a while. What's not to like?

Unfortunately, I believe we are in a similar position to those poor people who were on the Titanic when they were told [after hitting the iceberg] that there was no cause for concern. There weren't enough lifeboats then and there certainly aren't enough now. Who is big enough to bail out the US?

So short term the stock markets could do quite well. Look for the Lemmings [small investors] to start loading up. The stock market rallied over 80% and the small guys were out ---now they are getting in. This means that you can do quite nicely in stocks for awhile. But you are going to have to be ready to get out so you don't get caught again.  

Gold and Sliver [as well as other commodities] will continue to see a great deal of price volatility. Corrections of 20-30% are to be expected. Look for the Wall Street analysts to call the end of the great bull market in commodities during these corrections ----then start buying again.

My specific recommendations haven't changed. Scale out of your US bond positions ---the longer the duration of your portfolio the faster you need to get out. Junk could do well with the growing economy ---but be very careful not to hold the paper too long. Continue building a position in TBT [double short the long dated Treasuries] with a target of being fully positioned by early to mid 2012.

You should also continue adding to your long gold and silver positions by buying on dips. Buy GLD,SLV and physical coins. While I expect gold to advance to the $1,500-$1,600 level this year and silver to also see new highs, I expect we will see some intervals of weakness especially in the late 1st through early 3rd quarters. Keep your powder dry and look to buy into these dips.

Good Luck

Disclosure: I am long GLD, TBT.