An ideal allocation for a dismal Economy
By Scott Ryan
Nothing has changed with regard to the fundamental reasons for buying gold. The thesis remains 100% intact. Hedge funds in the past week have been selling off their positions, causing a temporary price decline. These are short term traders who commit billions of dollars of other people’s money based upon formations on a chart – not sound reasoning. A “strong dollar” is a complete misnomer. Picture a teeter totter on the deck of the Titanic. One can be “up” versus the other; however, the problem with all fiat currencies is the same. Which is “up” versus which on any given day is irrelevant in the longer term. By “longer term” I’m talking months – not years.
The greatest risk ultimately is being long fiat paper backed by the utopian fantasies of prodigal governments.
You have to be long gold. The dollar has lost 96% of value versus gold and will eventually lose the other 4%.
To mitigate volatility, as a means of diversification, I like the utility ETF – Select Sector SPDR-Utilities (Symbol: XLU) yielding over 4%.
The treacherous policy of the Fed is creating a bubble in junk bonds as it appears the only option for seniors looking to replace the yields of their maturing CDs. I do not like the junk bonds or any bonds right now. I expect bonds and bond investors to get destroyed as the government is forced to “inflate their way out of the debt”. Millions of senior citizens will fall prey to brokers all too willing to sell them the junk bonds and leveraged funds. I think the equity offered in the utilities with the dividend yield is a better place to look for current income/yield than bonds. Sure, you could go out and buy one utility alone and get a higher yield –but- the ETF provides important regional diversification. This is important in this economic climate.
I also love Microsoft here. I have rarely been excited about MSFT but here at this level, selling at a mere $200 billion market cap – it is a fraction of its former high of $614 Billion, 9 times earnings and a solid 3% + dividend. As when I was recommending Ebay at around $12.00 (2/23/2009) – my thesis was that the sum of the parts were worth far more than the market was – temporarily – appraising the whole. I concluded the rapidly growing PAYPAL which is owned by Ebay was worth more than the current price of Ebay; thus it was only a matter of time before the value was FORCED upward by the growing cash flow and EPS.
Source of ebay rec: http://boards.fool.com/mrarbitrage-on-dakt-long-27464408.aspx?sort=postdate
I say the same for Microsoft (MSFT) here at the $25 dollar per share/$209 billion market cap. I can envision a future where their prudent acquisition of Skype may prove to be a Bonanza. Based on what I’m seeing from Skype, I believe that Skype has the potential to be worth $200 billion alone in a few years.
So, to recap.
You must own gold. To help offset over-all volatility, value and cash flow can be found in the utility ETF (XLU) -and- Microsoft is a compelling valuation here with a built in floor of cash, cash flow, low p/e and attractive dividend. Then keep up to 25% in cash for the short-term needs.
Thanks. I am also bullish on silver and I’ll tell you why.
1) Silver is an historic currency as well as an industrial metal. Its demand rises in goods times for use in electronics and other industries, and it rises in times like these, when the fiat currency is being deliberately beaten down.
2) Silver is being used up 12-15 times faster than it is being newly mined.
3) Silver is inexpensive enough to buy ordinary merchandise with should paper currency ever by shunned as worthless. You can’t buy a week’s worth of food or a tankful of gasoline with gold. That is, I hope you can’t!
4) Junk silver, 90% silver pre-1965 U.S. dimes, quarters and half dollars of no special numismatic value, are universally recognized in terms of silver content. They are not individually valuable enough to be counterfeited, and their value is easily calculated using the spot market price for an ounce of silver:
$ face value x 0.715 x spot price of silver = $ value of junk silver.
Example: At a spot price of $30.00, $1 face value of junk silver would have a paper dollar value of $21.45
5) Even in late 2011, silver is at lower ratio with respect to gold than the historical norm, indicating that it may have more upside potential than gold.
6) I believe that silver, and especially junk silver coins, are less likely than gold bullion to be made illegal to possess by ordinary citizens, as gold bullion was from 1933 to 1974.
7) One can easily buy physical silver at a local coin shop or from an on-line coin dealer like bulliondirect.com. Alternatively, one can buy an ETF (exchange traded fund) backed entirely by physical silver, such as SLV or SIVR, or a silver mining ETF or mutual fund..
A little free amateur advice. Both silver and gold can be seen to retrench even when, with a broader view, they are more or less marching upward. Lately this pullback has been caused by a need for the liquidity of the dollar after a stock market swoon, and when the commodity trading board decides to change the rules and require higher minimums. Neither of these fundamentally change the trends caused not by the narrow effects of the metals markets themselves (as in the Hunt Brothers runup of 1979-80), but by the developed worlds’s state of denial about just how dire the sovereign debt situation is. I don’t see this denial changing any time soon, as both parties in Washington squabble around the margins about whether to drive the debt over the cliff at 55 or 75 mph. That is, as long as the argument is all about fictitious cuts compared to a fictitious ever-higher baseline budget rather than compared to the previous year, or to expenditures we could afford to pay; and as long as every ten-year plan with all the pain in the last three years is replaced with another, similar ten-year plan every year; then silver and gold will be a better bet than the dollar and the euro for the forseeable future, even accounting for technical retrenchments. The latter represent buying opportunities, whether induced by manipulative larger players or not.
So, what’s the advice? Don’t be suckered into cashing in your silver or gold when you see a pullback. Cash it in when you think the policy to preserve the soundness of the dollar has returned, or when you absolutely have to have liquidity. This latest little flight to the dollar is not because it instills confidence–it instills less fear than the euro and is still, for now, the accepted reserve currency of world trade.
Ladd