Leeb on all commodites,US Economy and oil
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Message: Conference Call
Below is Stephen Leebs Ph.D's advisory column of today. If right, better times ahead for all commodites including oil.
Brian
Market Update: From the Editors of "The Complete Investor"
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Inside this week's update...
***** Has gold reached a turning point?
***** Cash cow? More of a stampede.
***** The impending rally.
***** The long-term winners.
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Some strange things occurred last week. In the first place, while the S&P fell some 8%, the drop in the broad market was nearly twice as great. That's a big divergence. On the surface, it looks rather dismal. However, we continue to remind you that the market today is being driven by irrational fear and not by the fundamentals (which are much more positive).
The other event that surprised everyone was the nearly 7% gain in gold prices, accompanied (at long last) by a jump in the shares of gold producers. We have been bullish on gold shares for some time, and disappointed by them in recent months. Nonetheless, the decline in gold shares seemed to reach a breaking point on Friday as they shot up an average of 10% - considerably outperforming all the major averages and certainly the broad market.
We have never seen gold do so well in the face of falling share prices, nor do we know of any examples from history. Does it mean the gold bugs will finally have their day? Let's consider ...
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Last Chance To See Dr. Leeb's “Investment Rally” Presentation
On November 21st, Dr. Stephen Leeb made an important presentation to a select group of investors concerning a major, time-limited money-making opportunity taking shape today.
To make sure none of his readers are left behind, Dr. Leeb has asked that the video be made available FREE online – but only for the next couple of days.
You can watch this video at the time and place that is convenient to you (so long as you have an internet connection). It won't take long, yet the information in it will give you an important advantage over the vast majority of investors – most of whom will miss out on the bulk of the gains, if history is any guide.
Don't delay, because a couple of days from now the recording will be taken down forever! To see Dr. Leeb's presentation right now, just click on this link ...
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COMPARING DOLLARS TO BULLION
One swallow does not make a Spring, nor one day's action a bull market. Nonetheless, the fundamentals that led us to recommend gold in the first place have only continued to strengthen in recent weeks, so we will be watching the market for follow-through of Friday's action in gold.
The standard argument against gold as a store of value in tough times has always been that it pays no interest, unlike T-bills, or other forms of short-term cash. The counterargument, made by gold bugs, is that cash instruments tend to lose value due to inflation and other factors that weaken the currency, but do not affect gold. An investor choosing between gold and cash has to consider the strength of these arguments.
Today, T-bills yield next to nothing. Investing $100 in them will, after a year, earn you just one copper-plated penny. The yield is a mere 1/100th of 1%. Is that really a great incentive to choose T-bills over gold?
On the other hand, the factors that could weaken the U.S. dollar (and favor gold) are growing stronger day by day. While gold supplies and production are limited, the number of dollars in the world today is multiplying faster than the most virile rabbits the world has ever seen. Faster than fruitflies in a rotting peach orchard or blackflies in a Canadian spring. Faster than...well, you get the idea.
By some estimates, the Fed has recently pumped over $7 TRILLION into the banking system. Just this morning, the news came that another $300 billion will be spent to rescue Citigroup. It seems the Treasury and the Fed have decided that as far as financial institutions go, the bigger they are, the more important that they don't fall. The authorities will simply create as much money as they need to support the banks, transferring the debt of these companies to the balance sheet of the government. The process puts the largest printing presses to shame.
In addition, we must recall that the new administration is determined to hit the ground running. Over the weekend, President-elect Obama announced some new and promising appointments. Timothy Geithner, who will be the next Treasury Secretary, though young, is a seasoned crisis manager. He has also played a role on the old team, headed by Paulson, which should mean a smooth transition. Lawrence Summers, as head of the National Economic Council is also a sound choice. These guys will surely keep the money creation process going until economic growth is back on track, and this will be the result...
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5% Inflation: The Secret Tipping Point for You and the Economy
In the decade ahead we will come to face some of the most monumental industrial and economic challenges we have ever encountered, including a global energy crisis…commodity crunches…a social security fiasco and a possible Medicare meltdown. Not to mention the ominous consequences of a prolonged period of gluttonous consumption, military imperialism, and fiscal recklessness: Factors that have led to record levels of corporate, public and private debt.
This great convergence of so many crises is leading to one terrifying (but inevitable) economic reality: An inflationary era, the likes of which America has never before seen. (Click here to find out what’s facing us shortly)
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THE FUSE IS LIT
The growing effort to tackle the financial crisis is driving money creation to record-high rates. The latest figures show a year-over-year gain in the monetary base of just over 75%. This is roughly twice as high as we have seen over the past 90 years! Money growing this much faster than gold supplies is extremely positive for gold prices.
Moreover, this amount of newly created money is like a massive heap of gasoline-soaked tinder, just waiting for a spark that will set off a positive explosion in the economy.
What will it take to light this fire? Perhaps the $500 billion-plus stimulus package that Obama has promised to sign right after his Inauguration. This money will likely go towards tax cuts for average Americans and maybe a little towards alternative energy. That will promote consumer spending and help the economy get back to growth.
Add that $500 billion to the $4 trillion in money market funds waiting for an excuse to buy stocks (or gold), and the result will likely be a massive melt-UP.
Of course, the turbulence in the markets and the economy will still continue. But the next act in this drama will be 1) an initial mega-rally in just about everything, followed by 2) a bull market mainly in commodities. The key commodity to own during this bull will be gold, though we would not be surprised to see oil trading at twice its current prices 18 months from now. So many oil projects have been mothballed because of today's low oil prices, yet the fundamentals creating demand pressure on oil remain. The world needs more energy.
In addition, we must not forget that the economy is not just an American concern. The Chinese stimulus package recently announced equals the size of the entire Chinese economy in the early 1990s. On a relative basis, it surpasses the American stimulus package.
One result of all that stimulus will be rising demand for resources that surpasses the world's ability to supply them. Gold, oil, silver, zinc, copper, platinum – all industrial commodities will experience the squeeze. Agricultural commodities will also become expensive in a world with a growing population.
It's foolish to try to call a bottom in the market, yet the odds that we are at the low have dramatically increased in recent days. This won't be the low for the next 10 years. Unfortunately, the cycle we have just been through will probably repeat itself. So two years from now the market may have peaked and fallen again. But over the next few months, we should have a substantial rally in which stocks and gold benefit handsomely.
As for which stocks will be the strongest performers in the rally, look at those which held their ground best on the way down. Though it may surprise you, commodity indices sharply outperformed the S&P 500 and virtually every other stock index this year. So we expect commodity stocks to lead the recovery too.
Our favorite commodity remains gold, since it will benefit from the bonfire of liquidity firing up our economic engine. But again, all commodities will benefit because too much money will be chasing too few goods – the classic definition of inflation.
So stick with our Growth Portfolio. Have some gold in a safe place. The volatility will continue, but it should be volatility on the upside on balance. Enjoy the rally. Just remember it won't last.
Until next week,
Stephen Leeb, Ph.D.
Editor
The Complete Investor
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