Warming up to Silver!
Mario Ricchio is publisher of the Ricchio Report Daily at xtremeinvesting.com
As we watch the DOW rocket up 260 points, one must not lose sight of the big picture. With each desperate attempt to pump up the equity markets, our leaders distort the market mechanism. Unfettered markets cleanse out excesses- for the good of all. But the politicians fear the consequences of free markets on a bubble era; likewise, they choose Sir Alan to bail them out. Money supply has risen sharply over the last two weeks to the tune of 80 billion dollars. The Big Banks fearing collapse put the money to work in the futures market and thus the rally since the lows at 7500.
Does equity intervention mean we should be invested in stocks?
The answer is a resounding no! While short-term measures are used to prop stocks, companies underlying business deteriorates. Since earnings are falling, any rise in stock prices would simple engender another market bubble. Foreign economies collapse, domestic costs accelerate, and pension plans under-funded mean earnings get squeezed for the foreseeable future. We think corporate insiders will sell into any pump in stocks and thus we wouldn’t be jumping in to catch the bounce. Sure shorts will get squeezed and there may be 5% upside left in the major averages- but the risk to the downside is far greater than playing in a faltering credit bubble.
If we don’t play equities for 5% upside potential, where do we put our money?
Let me state I don’t see the DOW going any higher than 9100 so we have seen the majority of the bounce. The risk/reward is not good enough so we look elsewhere for opportunities. Before we move forward: I want to publish our long-standing defensive asset allocation posture. We can proudly claim to have had 0% exposure to stocks since 1999! Our only changes since 1999 were as follows:
1999-Early 2002
74% Cash
25% Gold Stocks
1% S+P Puts
A change in May 2002
72% Cash
15% Gold Stocks
10% US Gov. Bonds
3% S+P Puts
Where’s the next place to make money?
As we stated above, intervention in the stock market serves to undermine the market mechanism and further imbalances in the current account, strong dollar, and consumer debt. The Fed increases the money supply but the measure only serves to increase debt in the system. Debt is the key word. Debt is the albatross weighing on our economy and more importantly the monetary structure. The Ricchio Report feels that excess credit pumped into the system for the means of perpetuating the credit bubble destroys the nations monetary unit-the dollar. As such, we feel the longer the money supply is used to ramp a distorted economy the more we must look to real money for safety. Look no further than gold and silver. In this discussion, we want to highlight silver. Gold gets most of the attention as real money and silver is relegated to industrial commodity status. Silver has played an important role as money for as many years as gold. But its just not history that silver has on its side- the fundamentals and technicals make an investment in silver a good bet.
The Ricchio Report is close to adding silver in our model portfolio, we are not there yet but close. Until then, we want to highlight what is peeking our curiosity in this market.
1) Demand continues to outstrip supply
2) Above Ground Inventories at low levels
3) Should regain status as monetary metal not just industrial commodity
4) Related to #3, Silver should see increase in investment demand outweighing any fall in industrial demand
5) On a technical basis, Silver stocks are outperforming the underlying metal.
While looking at the charts below, remember our theme that silver stocks lead the underlying spot price in silver. As such, the current out-performance in silver stocks, if it continues, would be a major positive divergence. More importantly, it would signal to us that a bull market in silver is close and we should begin to recommend physical silver.
Let’s go to the chartroom:
click on link for rest of article & charts goldseek.com |
