The Key Asset Classes For 2011 Will Be: Oil, Gold, And Stocks

Economic growth will be fine. The debt overhang will be handled by continuing and accelerated Quantitative Easing. Looking ahead, we are quite optimistic about demand for stocks, gold, and commodities in 2011

Investors are moving from bonds to stocks, and the huge cash balances at money market funds will likely find their way into stock and commodity markets in 2011. This means that inflation and commodities prices are likely to rise faster than wages, and those living on fixed incomes or bond interest will be affected the most, due to the fact that their money buys less of everything; both luxuries and necessities. However, the ramifications of this inflationary trend are also serious for wage-earners. In every inflationary period in recorded history, wages have risen more slowly than inflation.

Although government officials do not want to admit it, the current environment in the U.S. is one of rising inflation. If you are skeptical, look around at the costs of goods and services that you buy. You will see that they are rising, and in months and years to come there will be acceleration of this rate of increase.

So why does the government downplay this fact? The U.S. Government has many obligations tied to inflation, such as social security and other entitlement programs, and because of this, it behooves them to downplay inflation in their speeches and in their inflation reporting.

Over the last few years world stock markets have been very volatile, and unforeseen events have been more common than in previous decades. This year, we expect sovereign debt problems in Europe, debt problems in U.S. states and municipalities, periodic market shakeouts due to high-frequency trading, and stronger economic growth within the developed world, to create more market volatility. This volatility may create opportunities to buy gold, oil, and quality U.S. and foreign stocks at attractive prices. We expect the market to recover from all of these events by the close of the year and end higher than today’s values.

The debt crisis engulfing the developed world’s banks and governments will be solved by devaluing the U.S. Dollar, Euro, other currencies and by creating liquidity via Quantitative Easing, (QE), or the printing of new money. This liquidity will flow into stocks, precious metals, commodities, and commercial real estate. When these flows arrive, all of the above-mentioned asset classes will enjoy price rises, possibly even dramatic ones.

What this means to investors is that gold, oil and stocks (both U.S. and foreign) will be beneficiaries of the liquidity that is and will continue to be pumped by many central banks into world markets. Your U.S. dollars, Euros, etc. will not buy as much, but you can protect yourself from the declining currency by owning the above asset classes.

One of our resolutions for 2011 is to do a better job buying the dips. As always we will sell quickly to take profits or cut losses if the markets appear to be entering a long-term bear phase.

As we enter 2011, the U.S. dollar appears ready to rally. European governments have significant debt issuance needs in the coming weeks, which could cause some unsteadiness in the Euro. This period of dollar strength could cause a pullback in some of the commodities that have been so strong for the past few months.

Fundamentally, we see no cause for a big commodity or stock market selloff in 2011. Short-term sell offs of 10% will occur. On the economic front we see signs of growth. The banking system liquidity crisis, which has plagued the developed world for years will continue to be dealt with by the infusion of large amounts of liquidity into financial institutions and the financial markets. In summary, we believe that this QE will keep the stocks of growing companies in many countries, as well as oil, precious metals, foods and industrial metals moving up.