The latest meeting by the Federal Reserve was quite significant regarding its monetary policy program, and many economists will now need to revise their analyses.
The key sentence in the Fed’s statement was, “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” (Source: Board of Governors of the Federal Reserve System web site, May 1, 2013, last accessed May 2, 2013.)
Why is this so significant? For the past few months, many economists and analysts have been expecting that the Federal Reserve would begin to discuss when it would be appropriate to begin reducing its aggressive monetary policy program, specifically the monthly $85.0 billion bond-buying level.
Many were thinking that at this meeting the Federal Reserve would indicate that at some point in the future it would begin reducing its aggressive monetary policy stance. While the Fed did indicate that it might be prepared to reduce bond buying and lower monetary policy measures, this is the first mention in its press releases that an increase is possible.
In my opinion, this indicates that the Federal Reserve now believes that additional monetary policy might be necessary, whereas we all had been hoping that the U.S. economy would begin to improve. Clearly, the recent data has shown otherwise.
Job creation remains very weak, and various sectors, such as manufacturing, do not indicate that they will increase their level of production anytime soon. Internationally, we are also seeing continued weakness in many countries, which can only put downward pressure on our own economy.
With … Read More
One of the most confusing topics of late is the low level of the inflation rate even though monetary stimulus has been quite aggressive worldwide. The most recent data point came from Japan, in which consumer prices dropped by 0.5% in March versus the same time in 2012.
The Bank of Japan is just now beginning a new monetary stimulus plan in the hopes of moving the inflation rate back into positive territory, with the target at two percent. However, some analysts question the possibility of reaching the target inflation rate over the next couple years, even with this monetary stimulus plan. (Source: Fujioka, T., et al., “Bank of Japan Sees Inflation Nearing Target in 2015: Economy,” Bloomberg, April 26, 2013.)
This aggressive monetary stimulus package has driven the yen weaker, benefiting export-oriented companies; however, while the general inflation rate is low, prices for imports such as energy will continue to rise as the currency declines. Additionally, the monetary stimulus program to drive up the inflation rate will have an impact on property prices and will raise rent levels.
However, monetary stimulus is not enough to gain traction and increase the inflation rate. Japan needs structural reforms to its business sector to encourage expansion and growth. Psychologically, the average Japanese citizen has been used to price declines for many years—this mentality will be hard to change. As an example, the latest report showed that TV prices fell by 19% from last year. (Source: Ibid.)
In America, we’ve had monetary stimulus for quite a while, yet the inflation rate is still quite low, below the targeted level. In March, the consumer … Read More
As is quite evident from the past couple months, investing in gold can be rather volatile. Clearly, the huge sell-off in the price of gold bullion over the past couple of weeks has shocked some people; an interesting result has been the reaction from the retail public, as many are now buying gold bullion in record amounts.
Last week, the United States Mint actually ran out of the smallest American Eagle gold coin, and sales to India were 20% higher than the previous record, according to Standard Chartered PLC. Clearly, physical demand remains strong for gold bullion. (Source: Roy, D., et al., “Gold Rout for Central Banks Buying Most Since 1964: Commodities,” Bloomberg, April 25, 2013.)
Here is a key question for those who are considering investing in gold: what are your goals? Is a person investing in gold to diversify his or her assets or to trade and generate profits?
Having gold bullion as part of one’s portfolio can make sense as long as it’s understood that volatility will continue to be present. Since larger investors have added gold bullion as another asset to trade, determining the price of gold bullion has become increasingly difficult.
A chart for gold bullion is featured below:
Chart courtesy of www.StockCharts.com
The recent drop in gold bullion erased an estimated $560 billion in the value of central banks’ holdings, and it was one of the largest drops in 30 years. The huge spike in volume and the massive move indicate several large stops were triggered, causing the holders to liquidate their positions.
The question now: is the selling in gold bullion completed? Since … Read More
I hope you didn’t get caught off guard this past Monday with the broad market sell-off.
If you did, you need to really think about risk management and having a good investment strategy in place so that you can avoid or minimize the impact of a market correction.
And if you think that stocks will rally, don’t be so sure, because the current market climate is tricky and remains highly vulnerable to another correction, which, of course, could be much bigger.
You need to get rid of that invincibility feeling that’s probably stuck with you during the recent rally.
Success in trading and investing has nothing to do with bravery. Taking a risk to make big gains makes sense and has its place, but after the advance we had, you also need to be prudent and hedge your gains against the highly likely and bigger correction that’s still to come.
You need to have a viable investment strategy.
Taking some profits off the table makes sense, but you also need to protect your outstanding positions.
The sell-off on Monday indicates how nervous the market is, and don’t let anyone tell you otherwise.
So it’s an opportune time to remind you that you all need to hedge just like professional money managers.
My favorite investment strategy to protect gains is the use of put options as a defensive hedge against market weakness, or something that is called a protective put, or put hedge.
There is no special knowledge required. And it’s quite simple and easy to execute.
Think of this strategy as akin to buying insurance on your home, car, life, … Read More
The eurozone and the euro are still around, but the more I see what is happening in that region, the more I think something must be done, given the financial crisis.
You have the eurozone in a recession and a financial crisis specifically driven by turmoil in Spain, Italy, Portugal, Greece, Cyprus, and Ireland.
Greece is broke, and it could take decades to recover from its financial crisis. Heck, Greece may have to go and ask for another round of bailout money if the financial crisis in the eurozone holds.
The financial crisis in Cyprus is a red flag that needs to be watched. And despite the small size of Cyprus’ economy, the country is a mess, with no recourse but to seek more bailout funds or risk a default and exit the euro.
The two pillars of the eurozone, Germany and France, are stalling. Germany contracted 0.6% in the fourth quarter and is another negative quarter away from a recession. France is in a similar predicament and will need to wrench its way out of its potential financial crisis.
Even big-time investor George Soros, who knows a thing or two about economies in trouble having made a billion dollars shorting the pound decades ago, is pretty convinced that Germany needs to rethink its strategy and consider leaving the euro to avoid its own financial crisis.
The problem that arises is that Germany is the major reason why the eurozone is still intact, when it maybe should have looked at kicking out Greece and Cyprus.
But as long as Germany is staying in the eurozone, the probability of survival, in … Read More
Following the global recession, many countries still lack resurgence in their economic growth levels. Many central banks around the world have used their primary tool, aggressive quantitative easing, to try and revive economic growth.
One issue with quantitative easing is that it can drive a currency downward in value. This can have some positive effects in improving economic growth by making that nation’s goods cheaper and driving exports; although it can hurt economic growth, as the price of imports rise, driving up inflation.
This is a tough goal to achieve, in trying to increase economic growth through a very blunt tool, that of quantitative easing. Whereas some initiatives have laser-like precision, quantitative easing is not one of them.
One nation that has recently embarked on a very aggressive quantitative easing program, and will continue to do so, is Japan. In November, Japan elected a new Prime Minister, Shinzo Abe, who called for a very large quantitative easing program to jump-start economic growth. Since the election of Abe in Japan, the yen has fallen by approximately 15% against the U.S. dollar.
This has certainly helped Japanese car makers. Recently, the CEO of Ford Motor Company (NYSE/F), Alan Mulally, voiced his concerns that the Japanese yen’s decrease is increasing the level of competitiveness for Japanese car makers. According to the American Automotive Policy Council, Japanese car makers have a currency advantage worth approximately $5,700 per vehicle. (Source: Philip, S., “Ford CEO Says He’s Concerned About Effect of Weaker Yen,” Bloomberg Businessweek, March 26, 2013.)
The natural question is: if quantitative easing does help economic growth, why doesn’t every nation just do this? … Read More
One of the most difficult things to do is to try and determine the future level of economic growth. There are so many variables that go into the level of economic growth that no model can accurately predict the exact level.
What we can do is look for signs of economic growth, or a lack thereof, and create an investment strategy based on these indications. Looking backward won’t help; we need to look forward.
One method that can help is to see what the professional investors are doing, as they are on the cutting edge when it comes to creating a profitable investment strategy.
Last week saw two distinctly different moves by professional traders. The first was that hedge funds made a massive trade against copper. With global inventories piling up, professionals have an investment strategy that will benefit from the price of copper if it drops.
Clearly, the professional traders don’t believe there will be enough economic growth to absorb such a high level of inventory, which is currently at a nine-year high globally. (Source: Richter, J., “Hedge Funds Most Bearish Ever on Copper, Favor Gold: Commodities,” Bloomberg, March 25, 2013.)
Hedge funds increased their short positions in copper by a massive 53% last week, according to the Commodity Futures Trading Commission. Copper is closely associated with economic growth, since so many industries use copper. As economic growth expands, the use of copper does as well.
The build-up in copper supply is worrisome, as this means that either builders are holding back on ordering more copper, unsure of how strong economic growth will be in the second half, or … Read More
On the surface, the Federal Reserve’s objective is to make sure America doesn’t fall into ruins. Following an aggressive strategy of monetary easing, the end result is interest rates at nearly zero percent and an endless flow of easy money. As I have already stated many times in these pages, the Federal Reserve has created an artificial economy.
Yet, if you think about it, the Federal Reserve’s push for low interest rates has helped the economic recovery—but it has also made life difficult for many Americans. The Federal Reserve’s low finance rates tend to make consumers buy more, enticed by the low carrying charges. This means more buying in homes, furniture, cars, clothes, or whatever goods and services that can be financed at cheap rates. But therein lies the problem. What happens when the Federal Reserve begins to raise interest rates? It’s going to get ugly.
There will be massive debt loads that will be subject to higher carrying charges and greater hardships for many consumers as wages for many continue to be flat.
And with the low interest rates due to the Federal Reserve, people are reluctant to save. Making less than one percent at the bank is not exactly an incentive to deposit money. In my last article, I discussed this issue of low savings. According to the Employee Benefit Research Institute (EBRI), a staggering 57% of workers surveyed said they had less than $25,000 in combined household savings and investments, excluding their homes. (Source: Greene, K. and Monga, V., “Workers Saving Too Little To Retire,” Wall Street Journal, March 19, 2013.) The problem is that the low … Read More
The more I look at the size of the national debt, the more I get squeamish. With the national debt at $16.7 trillion and growing, something needs to be done, as the Federal Reserve continues to print money, creating the artificial economy that is making people think America is faring well and forgetting about the national debt.
The sequestration program will help, but will it hold as the two parties continue to argue about where the cuts should be from and alternative revenue sources? Budget cuts due to the sequestration are already at $17.2 billion and running (source: U.S. Debt Clock web site, last accessed March 14, 2013), but as I have said on numerous occasions, $85.0 billion a year will likely do very little to tackle the mounting national debt. Just the interest on the national debt is already around $223 billion, so the national debt will continue to expand in spite of the sequestration cuts. I wonder if the government gets it. You have $17.2 billion in cuts as of March 14, but $223 billion in interest costs. Something just doesn’t add up here.
The U.S. national debt as a percentage of the country’s gross domestic product (GDP) stood at 102.9% in 2011. (Source: “List of Countries by Public Debt,” Wikipedia, last accessed March 15, 2013.) This was just below the massive 208.2% in Japan and the 160.8% in Greece, according to the International Monetary Fund (IMF).
Translation: America is in a financial mess, and it will not be easy to get out of it.
And despite the national debt burden, the Federal Reserve has its hands tied. … Read More
The recent pullback in gold bullion has certainly hurt gold mining stocks. While one can develop a sound investment strategy, if the price of the stock continues moving downward, it makes it extremely difficult to step in and buy.
Gold mining stocks have seen a serious sell-off over the last few months. So what about gold mining stocks as a long-term investment strategy?
To begin with, looking at the commodity from an investment strategy point of view, gold has pulled back and has bounced off a key support level. Obviously, whatever direction the price of gold moves, the majority of gold mining stocks will move in tandem.
No one can predict the price of a commodity for certain. However, we do know that there remains strong demand for physical gold and that central banks around the world continue to have easy monetary policies.
While that is a sound investment strategy, it does not guarantee that gold will see an increase. The market could continue declining, as more sellers of paper gold emerge.
Assuming that gold prices will increase, gold mining stocks are beginning to look attractive, because they’ve declined to such a level that many are trading at a discount to book value. This means that if the company were to be bought and sold in pieces, the sum of the parts is worth more than the current stock price.
This type of investment strategy, looking for value, is one approach that an investor can take when trying to determine which gold mining stocks might be suitable for their portfolio. Momentum is not bullish for gold mining stocks at the … Read More
It’s clear that the global economy has been in a weak state for an extended period of time. However, investor confidence has rebounded over the past few months in anticipation that the global economy can regain past momentum.
Numerous problems remain across various sectors in the global economy, and they are preventing an increase in growth. Yet one risk that could severely impact investor confidence is the possibility of war in Asia.
Many people quickly dismiss the idea that yet another war could ignite. Investor confidence clearly doesn’t see this as a probability, considering how high the stock market is. However, as a prudent investor, one must evaluate every potentiality.
There are two areas of concern: North and South Korea, and China and Japan.
The situation between North and South Korea is quickly deteriorating. This past Monday, both nations staged war games, while increasing threats. South Korea has troops on high alert, while North Korea claims it has nullified the armistice.
North Korea is increasing its aggressive stance in the hopes that the world will back down and cave in to its demands. The nation has repeatedly warned that it will use nuclear weapons.
Tensions are also increasing between Japan and China, the catalyst being three tiny islands in the East China Sea.
Both nations claim territorial rights to the islands, with each nation increasing its aggressive stance. On January 10, two Japanese F-15s intercepted a Chinese plane flying in the vicinity of the islands, an action to which China retaliated by sending its own fighter jets.
Japan is now considering firing warning shots if any further Chinese aircraft encroach … Read More
While I do like gold, I’m somewhat perplexed over the metal’s near-term stock chart. The chart shows indecision and indicates a potential downside break at $1,550, with gold potentially falling out of its current sideways channel.
And it also appears that the professional money has mixed feelings about gold. Famed investor George Soros cut his gold holdings, but Paulson & Co. made no changes. (Source: Rooney, B., “Soros dumps gold as prices sink,” CNN, February 16, 2013, last accessed March 12, 2013.)
Despite gold’s reputation as a safe haven to stash your money, there is a lack of buying interest across the board, as the sentiment toward gold is rapidly declining; hedge funds are selling.
So, is a major downward move on the chart coming?
In my view, gold is at a crossroads. It could continue to trade in its sideways channel, where you can simply buy on weakness down to $1,550 an ounce and sell on rallies.
While I agree the near-term risk is high and could see prices move downward toward $1,500 an ounce, any major declines in gold prices should be viewed as a potential opportunity to accumulate gold as a contrarian investment, especially if the eurozone mess intensifies and an asset bubble surfaces in China (which is also seeing a dangerous rise in inflation to 3.2%). The problem in China is that the new government’s strategy to drive consumer spending to spur economic growth will only add to the inflationary pressures and overall market risk that are already present.
I also sense that the market is underestimating the major debt and growth situation in Italy and … Read More
The recent pullback in gold has certainly unnerved long-term investors. It has also seen a dramatic shift in market sentiment. However, recent data shows that this shift in market sentiment has primarily come from shorter-term institutional funds.
When considering gold as an investment, one must consider the timeframe as well as the underlying participants in the market. Market sentiment for every asset class oscillates from overly optimistic to overly pessimistic. The goal for the long-term investor is to use this volatility to accumulate during overly pessimistic times and take profits during overly optimistic times.
According to Barclays PLC (NYSE/BCS), gold-based exchange-traded funds (ETFs) are set to record the weakest month on record. Barclays notes that during the period of February 20–25, the net outflow of gold from exchange-traded products (ETPs) totaled 10 metric tons per day. The vast majority of gold redemptions stem from the SPDR Gold Shares (NYSEArca/GLD) ETF, with a decline of 58 metric tons for the month of February. (Source: Saefong, M., “Gold ETP flows set for weakest month on record: Barclays,” MarketWatch, March 1, 2013.)
While physical gold continues to remain in demand (as we’ve seen central banks around the world, including Russia and China, continuing to accumulate), market sentiment for paper gold has recently become negative.
The net level of institutions investing in long-term gold at the Comex is the lowest since December 2008, and new funds are going to short the gold market. This is becoming a classic battle between the bulls and bears regarding market sentiment for the gold market.
Physical gold is a slower, more long-term market than paper gold. Institutions favor … Read More
There’s talk of hedge funds dumping gold. Despite its attractiveness as a safe haven to stash your money, there is a lack of buying interest across the board, as the sentiment toward gold is declining fast. Some are even saying the bulls should pack it in. While I agree the short-term risk is high and prices could move down toward $1,500, I continue to like the longer-term outlook, as I believe that any major decline in gold should be viewed as an opportunity to accumulate the precious metal as a contrarian investment.
We are hearing more whispers predicting prices could spiral lower, but while I’m neutral at this point, I continue to be convinced that gold will rally higher in the long term.
The jury is still out on the potential of gold. The situation in the eurozone remains fragile, but there have been some signs of improving sentiment, which is what traders want to see.
In early January, Marc Faber, also known as “Dr. Doom,” in an interview with CNBC suggested gold could correct 10% or more to as low as $1,550–$1,600. (Source: Belvedere, M.J., “‘Dr. Doom’ Faber Sees Possible 10% Gold Correction,” CNBC, January 8, 2012, last accessed February 25, 2013.)
In my view, gold continues to be a place to park some capital; and for this reason, I feel the metal will continue to attract support above $1,500 after 11 straight up years.
The chart shows sideways trading with major support around $1,550 and upper resistance at $1,800, as indicated by the horizontal blue lines in the stock chart below. Within this trading band, there’s a downward … Read More
Since hitting a low of $253.70 in July 1999, gold prices have surged over 650%, topping $1,921 per ounce in September 2011. Currently trading at more than $1,660 per ounce, gold has logged 13 consecutive years of positive returns. While some economists think gold’s historic run will come to an end, others are not so sure.
The overarching driver of the price of gold will continue to be the global financial crisis, ongoing tensions in the Middle East, weaker currencies, and the potential for faster inflation. As a result, some analysts believe gold will rise above $2,200 an ounce in 2013.
At the other end of the spectrum are those bears who think gold is in for a big correction. Greater-than-expected U.S. growth, a stronger U.S. dollar (in spite of the Fed’s printing presses running overtime), and the end of the crisis era could pull gold down to as low as $1,200 an ounce.
Try telling that to Russia, Brazil, Korea, China, Kazakhstan, Turkey…
To stave off the negative impact of the global crisis, the National Bank of Ukraine raised the percentage of gold in its reserves in 2012 to 7.7% from 4.4% a year ago, reaching 1.1 million troy ounces. (Source: Chanjaroen, C., “Russia, Kazakhstan Expand Gold Reserves as Central Banks Buy,” Bloomberg, January 28, 2013, last accessed February 6, 2013.)
Brazil doubled its gold holdings in two months, buying 17.2 metric tons in October and 14.7 metric tons in November. And in August and September, Iraq increased its gold reserves to 31.1 metric tons from 5.8 metric tons.
The Bank of Korea increased its gold reserves by 20% … Read More
China continues to grow at a rate far above the levels seen in the other industrialized countries. And to fuel its expected superlative growth over the next decade, which could be the country’s golden years in spite of what some critics are saying, the country will need raw materials, based on my stock analysis.
The country has always been a major importer of raw materials, including metals, oil, and forestry, but my stock analysis suggests China is aggressively pursuing exploration in oil and metals. China has also looked to add resource companies via takeovers around the world in such places as Canada, the United States, and Africa in order to have some control over resource reserves, according to my stock analysis.
A recent example of this was the Canadian government’s somewhat surprising approval of the $15.1 billion takeover of Canada-based Nexen Inc. (NYSE/NXY) by China state-owned CNOOC Limited (NYSE/CEO) to go through. The deal was initially thought to be axed by the Canadian regulators and government, citing the security concerns of a takeover of oil reserves by the Chinese government-controlled CNOOC. Canada has rejected takeover bids from Chinese companies in the past, citing the need to safeguard its mineral and energy resources, so this deal was a surprise. Based on my stock analysis, I suspect Canada may have felt pressured to approve the deal, as the country wants to open up more trading with China; a rejection of this deal by the Canadian government would not have looked good in the eyes of the Chinese government.
The reality is that there will be compromises as far as acquisitions of foreign … Read More
Many investors in gold bullion have become increasingly worried due to the lack of price appreciation lately. Even though there has been an aggressive monetary policy initiative by the Federal Reserve, gold bullion and mining stocks in the sector have declined.
Obviously, no one can predict the future; it’s impossible to know for sure where gold bullion, or mining stocks in general, will be in the future.
However, there are several things that individual investors can do to enhance their probability of success when it comes to investing in gold bullion mining stocks.
One metric that I watch is the debt level of a company. This doesn’t mean to avoid all mining stocks with high levels of debt; rather, one should only buy these companies at a discount, unless they are growing rapidly. Gold bullion mining stocks with high levels of debt are far more likely to be susceptible to negative shocks.
Because interest rates have been low for some time, gold bullion mining stocks with high debt have been able to get away with relatively low rates of financing. But over the next five years, we are certainly looking at a higher interest rate environment; this is one area of caution for investors.
One way to look at gold bullion mining stocks is in two general categories: low- or no-debt mining stocks and high-debt mining stocks. The companies with a high debt level should not trade at a premium when compared to gold bullion mining stocks with low levels of debt, unless their growth rate is above average.
Here are three stocks that are great examples.
One of the … Read More
In April 2011, when silver was trading at $50.00 an ounce, Bank of America Merrill Lynch was extremely bullish and suggested $80.00 was possible. (Source: “Prospect of silver hitting $80 shakes up stock, ETF markets,” International Business Times, May 1, 2011, last accessed January 22, 2013.) Of course, this hasn’t been the scenario, as the metal faces tough resistance at $35.00. Until there is a strong breakout here, I doubt the $40.00-level will be achievable.
While the majority of investors focus on gold, I feel silver could actually have more price upside, given its more speculative nature as more of a trading commodity.
In reality, the buying in the white metal is generally in line with the global economic growth, driving the demand for industrial goods that use silver as a raw material, pushing up income levels, and increasing the global demand for jewelry.
Here in the U.S., the economic recovery is faring well. The better-than-expected U.S. gross domestic product (GDP) growth, revised up to 2.7% for the third quarter, along with other encouraging economic data are also adding some optimism of economic renewal. China is offering some hope of a turnaround, but the stagnant condition in the eurozone and Europe remains an issue.
As I said, while gold is considered more of a pure-play hedge against risk, any sign of industrial recovery helps, as silver, unlike gold, is used in numerous industrial applications.
As you can see on the chart, silver is caught in a sideways channel, largely between $30.00 on the support side and $35.00 on the top of the channel. Silver is currently testing its 50-day moving … Read More
Gold is currently in a holding pattern at below $1,700 an ounce, but one thing is for sure: in spite of what some pundits are saying, it’s not time to sell yet. In an interview on CNBC, Marc Faber, also known as “Dr. Doom,” suggested that gold could correct 10% or more to as low as $1,550 or $1,600. (Source: “‘Dr. Doom’ Faber Sees Possible 10% Gold Correction,” Yahoo! Finance via CNBC, January 8, 2012.) While I’m not as negative, I do believe gold could retest support between $1,600 and $1,625 in the near term. Failure to hold could see a sub-$1,600 price.
In my view, gold continues to be a place to park some capital, and for this reason, I feel the metal will likely continue to hold above $1,500 after 11 straight up years.
For instance, if we assume the global economy will weaken, especially in the eurozone, the impact on global gross domestic product (GDP) growth would be negative. Stock values would fall, so you would need a safe haven to park your capital, which many of you know is in gold.
There’s been plenty of talk around here regarding whether the precious metal is heading for $2,000. In my view, the current global risk will support and drive gold higher.
The chart shows sideways trading around the 50-day moving average (MA) with weakening technical indicators, based on my technical analysis. I view downside moves as an opportunity to accumulate the precious metal, given the current macro situation.
Chart courtesy of www.StockCharts.com
I continue to like gold going forward, given the massive financial distress and recession in … Read More
One of the biggest investor mistakes by the average retail investor is to be late to cash in on an investment theme. These investor mistakes are not limited to just the stock market, but all types of investments. If we look at investor mistakes by the retail public for buying real estate, most people were bullish at the top of the market and were selling, or were forced to sell, their real estate at the bottom. Buying high and selling low is one of the most common investor mistakes by the majority of the public.
Since 2008, the biggest trend for the average investor has been to get out of stocks and to park money in U.S. bonds. EPFR Global, a provider of data, reports that since 2008, equity funds have had a net redemption of $467 billion, compared to bond funds that have seen an influx of $1.1 trillion. (Source: “Desperately Seeking Yield,” The Economist, November 10, 2012, last accessed January 2, 2013.)
According to Morningstar, money flowing into bond mutual funds accelerated in 2012, with 26% of household investments in U.S. bonds up from 14% in 2008. This was during a year in which the S&P 500 was up a solid 13%, now up over 111% since the low in March 2009. Meanwhile, 10-year U.S. bonds are currently offering a negative yield after inflation, meaning people are willing to lose money over 10 years because they are so scared of the market. (Source: “Bond Craze Could Run Its Course in New Year,” New York Times, December 31, 2012.)
This type of thinking is one of the most common … Read More
Happy New Year to all of our Investment Contrarians readers!
In 2012, small-cap stocks were the second-best performing group, following the technology sector. The Russell 2000 was the top performer in December and has been since the end of the first quarter. How the small-caps fare this year will, again, depend on the global economy.
My stock analysis tells me that what happens in January will be an important indicator for the year as far as performance. Historical records indicate that stocks have increased an average of 1.6% in January since 1969, according to the Stock Trader’s Almanac. In 2012, January was a strong month, so it was not a surprise to see the relatively good advance in stocks.
As we move into 2013, the focus will be on any remaining fiscal cliff fallout and the impact of the deal, along with the eurozone mess, the U.S. national debt, and jobs growth.
For 2013, my stock analysis is cautious to start the year, based on the high global risk.
The fact that the economy is triggering some jobs growth is encouraging. My analysis is that this will likely continue in 2013, although the unemployment rate is expected to remain relatively high at over seven percent.
My stock analysis shows that we need to see leadership from such areas as the financial and technology sectors. The big banks were strong in 2012, but we also need to see technology take a leadership role.
It definitely will be a tricky year, given the global and domestic issues, along with suspect earnings and revenue growth to start the first quarter.
Again, as I … Read More
We’re two weeks away from surviving the Mayan Doomsday and three weeks away from stepping over the fiscal cliff. But the unabated student loan debt is just getting warmed up. Instead of dealing with the problem, Washington’s policies continue to stoke the fire. And that economic strain spells continued misery for America’s ongoing credit crisis woes.
Outstanding student loan debt has surged 165% in just seven years, from $360 billion to $956 billion. Furthermore, the average loan balance for U.S. college students has increased more than 68% since 2005 to $27,000. (Source: “Student Loan Debt History,” Federal Reserve Bank of New York web site, last accessed December 11, 2012.)
On a more granular level, student loan debt jumped $42.0 billion, or 4.6%, over the previous quarter to $956 billion. During the same period, car loan balances increased for the sixth consecutive quarter to $768 billion. U.S. credit card debt held firm at approximately $601 billion.
Eleven percent of all student loan balances are 90 or more days delinquent, surpassing all other forms of debt. Credit cards, car loans, and mortgages are all in better shape than student loans, with 90-day delinquency rates of 10.0%, 4.3%, and 5.9%, respectively.
According to the Federal Reserve, student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008, and it is the largest form of consumer debt outside of mortgages. What’s more is that unlike credit card debt, student debt is not forgivable in bankruptcy.
And that is creating a nightmare scenario for graduates young and old. In fact, every age group is experiencing … Read More
Silver continues to hold strong on the charts, with a possible upcoming move at the tough $35.00 resistance level and potential retest of the $40.00 level. The aggressive upward move has largely been driven by the move in gold, along with speculative trading.
Buying in the white metal is generally in line with global economic growth, which drives the demand for industrial goods that use silver as a raw material, while it also pushes up income levels and the global demand for silver and gold jewelry.
Here in the U.S., the economic recovery is faring well. The better-than-expected U.S. gross domestic product (GDP) growth revised up to 2.7% for the third quarter, along with other encouraging economic data, is also adding some optimism of economic renewal.
While gold is considered more of a pure-play hedge against risk, any sign of industrial recovery helps, as silver—unlike gold—is used in numerous industrial applications.
The price of silver has had some bull legs on the chart since its breakout in August, based on my technical analysis.
As you can see on the chart below, the upward move in prices for March contracts above the 50- and 200-day moving averages (MAs), which is bullish. The March silver is also showing a bullish golden cross with the 50-day MA of $33.09 above the 200-day MA of $31.06.
The MA convergence/divergence (MACD) is also quite bullish, but it may be approaching a top. The risk is that the run-up appears to be overextended and vulnerable to some near-term selling pressure with resistance at around $35.00. For the white metal to advance, we need to see a … Read More
The historic and unprecedented action by the Federal Reserve in enacting extremely loose monetary policy is an attempt to stimulate the economy. I’ve always felt that a central bank should have one mandate: the stability of the currency. The Federal Reserve has a dual mandate; in addition to keeping inflation in check, the American central bank also is attempting to lower the unemployment rate through monetary policy, a task not easily achieved.
Over the last couple of years, we have clearly seen that, while the economy has started to improve, it is far below potential gross domestic product (GDP) growth levels. Even with the historic monetary policy initiatives, the Federal Reserve is limited in what it can and cannot do. While the Federal Reserve may have good intentions, there are serious consequences due to unintended outcomes.
Through monetary policy action the Federal Reserve is attempting to increase the wealth effect by increasing asset prices. The thinking is that the wealthier people become through the increase in their assets, the more likely it is that they’ll be willing to spend. This action is one reason why we’re seeing gold prices go up, as well as the stock market and home prices since 2009.
Recently published data show that at least this part of the plan by the Federal Reserve is working, as the net financial wealth for Americans increased by $1.7 trillion to $64.8 trillion for the third quarter 2012. According to the Federal Reserve, this is the highest level of net worth by U.S. households since 2007. (Source: “U.S. household wealth rises to near 2007 high,” Reuters, December 6, 2012.)… Read More
I’m tired of reading and talking about the so-called “fiscal cliff,” but it could spell dire consequences for the economy if it is allowed to go through (and even if not). The reality is that America needs to stop printing money with no regard for the massive national debt load. Allowing the debt to continue to rise will punish the country’s future generations.
If we assume that the global economy will weaken, especially in the eurozone, the impact on global gross domestic product (GDP) growth would be negative. Stock values would fall, so you would need a safe haven to park your capital, which many of you know is in gold.
There’s been plenty of talk around here regarding gold and whether the precious metal is heading for $2,000. In my view, the current global risk will support and drive gold higher.
For any gold investor, the question is whether to buy the physical bullion or gold mining stocks. For the average investor, I favor gold stocks over the higher risk of other options.
The mining sector continues to be an excellent place to make money. An investment strategy would be to buy a mixture of exploration-stage gold mining stocks along with small to large gold producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers.
For exchange-traded fund (ETF) investors, the SPDR Gold Trust ETF (GLD) is worth a look and is currently trading in a sideways channel above the 50- and 200-day moving averages (MAs).
Chart courtesy of www.StockCharts.com
If you are looking at … Read More
When it comes to commodities such as gold bullion, there are several criteria that ultimately determine the price level. Many times, I have discussed the impact that easy monetary supply, commonly known as money printing or quantitative easing, has on the economy. Quantitative easing is a well-known phenomenon these days, and the current environment is interesting in that numerous central bankers around the world are engaging in the same monetary policy, trying to print money to solve short-term problems, irrespective of the long-term side effects.
In my article “Gold Bullion Forecast for 2013,” I stated that, when considering the level of monetary policy stimulus worldwide, it is highly likely that gold bullion will exceed $1,800 shortly, with a strong possibility for gold prices reaching $2,000 an ounce in 2013.
However, new information makes this prediction even more probable. The demand side of the equation for gold prices is extremely important. India has long been a huge consumer of gold bullion. Recently, however, because of the weak rupee, India’s currency, gold prices in that nation have been at all-time highs. This has led to lower levels of gold bullion buying and, earlier in the year, a strike by gold bullion dealers to protest an import tax imposed by the government on gold bullion.
In spite of lower than normal gold bullion demand by Indian buyers, gold prices have remained extremely strong. A new report by the World Gold Council’s India office stated that they believe Indian demand for gold bullion in 2012 will end up reaching approximately 800 metric tons, a substantial increase from earlier estimates of 650–750 tons. (Source: “India … Read More
Gold bullion has had a fairly volatile year in 2012. At the end of 2011, gold bullion sold off sharply, ending December at a weak point. A lot of this, I believe, was a result of hedge funds being forced to liquidate their positions. Investors in gold bullion should be aware of the flow of funds from institutional investors. Because of the huge amount of capital that institutions have, they can certainly have an outsized impact on any market, not just gold bullion.
Once a fund has liquidated its position, the selling ends and the underlying fundamentals take over. For 2012, we’ve seen further price appreciation for gold bullion beginning in August on anticipation for accelerated monetary policy stimulus (more money printing) from the Federal Reserve.
That is exactly what we got from the Federal Reserve, a very aggressive monetary policy initiative that has no end date. This type of monetary policy action is unprecedented for the Federal Reserve. As is so often the case, investors bought on the rumor and sold on the fact. Following the September announcement for the new monetary policy initiative, a third round of quantitative easing (QE3), gold bullion sold off with the rest of the market.
To be honest, this is to be expected, considering the large move in gold bullion. Nothing moves up in a straight line. Once the markets tested the $1,800 level, considering gold bullion moved up from approximately $1,550, some profit-taking was to be expected. The key question for me was: at what point would investors step back into the gold bullion market?
Chart courtesy of www.StockCharts.com
This one-year chart … Read More
No one said austerity measures would be an easy pill to swallow. But, after decades of overspending, they’re become an unwanted necessity. And the fed-up workers of Europe are uniting!
Protests broke out Wednesday across Europe in a coordinated day of action over ongoing austerity policies. While some of the largest and most violent protests took place in Spain, Portugal, Greece and Italy also took to the streets.
Over the last three years, Spain, Portugal and Greece have all slashed spending on pensions, public sector wages, hospitals, and schools in an effort to get public finances back on track.
It hasn’t kicked in yet. In Portugal and Greece—both rescued with European funds and under strict austerity programs—the economic downturn increased in the third quarter. Portuguese unemployment jumped to a record 15.8%. In Spain and Greece, one in four of the workforce is jobless. (Source: Tisera, F., and Alvarena, D., “Anti-austerity marches turn violent across southern Europe,” Reuters, November 14, 2012.)
In an effort to stem the economic slide of the U.S. housing collapse that first surfaced in 2005, the Federal Reserve initiated quantitative easing in November 2008. To date, the Federal Reserve has printed off close to $3.0 trillion. That number climbs by an additional $85.0 billion each month. It was supposed to increase lending, create more jobs, kick start housing, and lower the unemployment rate.
What has really happened? After three rounds of austerity measures, unemployment is rising, company profits are falling, financial markets are fragile, and the housing sector is still in disarray. What has it done? It’s created a weak dollar and an anemic economy…. Read More
The market is moving lower, and there’s nothing that appears to be supporting it. The S&P 500 has lost nearly eight percent since its peak of 1,465 in September.
The fact that the S&P 500 failed to hold above 1,400 was not a surprise, based on my technical analysis. In May, the break at 1,400 was the S&P 500’s fourth top above 1,400 since 2008.
Since the election, the market has edged lower in six of seven sessions due to heightened stock market risk.
On average, only about 37% of U.S.-listed stocks are trading above their respective 200-day moving averages (MAs), versus 61% a month ago. The short-term weakness is even more prevalent with about 19% of stocks above their respective 50-day MAs, versus 61% a month ago.
What happened to what were supposed to be the best six months of the year for investment gains?
Based on historical records, investing in the six months from November to May has produced the best returns for stocks versus the June to October period, according to the Stock Trader’s Almanac.
So far, November has been horrible, with the key stock indices down more than four percent. But as I said when I previously discussed this pattern, things could be different this time around, given the abundant stock market risk, including the financial crisis in the eurozone, a stalling economy in China, tension in the Middle East, and the presidential election and upcoming fiscal cliff in the U.S.
We are seeing some selling capitulation in the market because of the abundant stock market risk and lack of any positive news that would encourage … Read More
With the recent new monetary policy initiative by the Federal Reserve, one area that I’m becoming more worried about is the impact this will have on inflation. While inflation has declined from the highs in the 1970s, there is always the worry that monetary policy could ignite the flame of higher prices in the future.
The problem with inflation is that once it becomes imbedded within a society, it is extremely difficult to eradicate. While commodity inflation is troublesome, it’s not the biggest worry, as those prices can quickly adjust. It’s not difficult for the price of wheat to decline if there is a large crop, for example.
The problem with monetary policy actions that are too easy for too long is that inflation starts to creep into wages. Once you have wage inflation, it is extremely difficult to remove from the system. While the price of wheat can decline 10% quite easily, wages cannot move in such a manner.
So far, wages have not moved at all. This is due to the slack in the economy. The slack denotes the difference between current and potential gross domestic product (GDP) growth rates. Monetary policy action is used to help decrease this gap, to adjust it to prevent inflation from occurring. The problem is that this is not an easy task.
The other question is: what happens if inflation is rising but the economy does not increase its pace of growth? Should monetary policy action remain accommodative? This is the current dilemma for the Bank of England.
The Bank of England has an inflation target of two percent. They, too, have … Read More
Gold and silver continue to be bullish on the charts. I can see gold breaking to $1,800 an ounce, something that nearly materialized on October 5, when cash gold traded at $1,795.78 prior to slipping. The last time gold was above $1,800 was on November 8, 2011.
Silver is holding around $34.00 an ounce; but I’m not as bullish on the white metal, because the price is largely driven by the direction of the global economy.
I continue to like gold going forward, given the financial crisis in the eurozone—and, trust me, it is not going to get better anytime soon. It could take years. Moreover, with a recession expected to hit the eurozone in 2013, the crisis could deepen further.
Across the Pacific, you have the stalling in China and its impact on the other Asian countries, like South Korea and Japan, along with the smaller emerging Asian countries.
For those of you who took my advice to hold on and accumulate gold on weakness down to $1,600, it has been a nice ride. Major price weakness should be viewed as an opportunity to accumulate.
I favor the metal plays and continue to see opportunities, especially in the mining companies and junior gold miners.
China and India continue to be the world’s top buyers of gold, and this is expected to continue. China has also been buying mining companies around the world in an effort to increase its reserves. This is a reason why I like some of the smaller mining companies, especially those with a massive reserve of proven metals in the ground, waiting to be developed and … Read More
Never mind gold and silver, strong growth for carbon fiber is making this composite an area for investors looking for a niche play, based on my stock analysis.
Carbon fiber is a compound used for applications that demand a high strength-to-weight ratio and rigidity. The material was previously found only in high-cost applications, but my stock analysis shows that prices have been declining over the past years, with carbon fiber being increasingly found in numerous consumer products, including laptops, tripods, fishing rods, tent poles, racquet frames, bicycles, sporting equipment, golf clubs, and motorcycles.
The commercial applications of carbon fiber include aerospace, automotive, offshore drilling, infrastructure, marine, energy storage, and wind turbines.
The global carbon fiber market is expected to see an estimated annual growth of 17% over the next five years to around 118,600 tonnes and a market value of about $7.3 billion by 2017, according to a report by Smithers Apex. (Source: “The Future of Carbon Fiber to 2017,” Smithers Apex, http://www.gmc2.org/images/pressreleases_pdfs/Future_of_Carbon_fibre_2017.pdf.) From 2012 to 2020, the annual growth for carbon fiber–reinforced plastics is estimated at 16%. These metrics make carbon fiber plays an intriguing opportunity, according to my stock analysis.
A potential play in the carbon fiber market for aggressive investors is small-cap, special situations play Zoltek Companies, Inc. (NASDAQ/ZOLT), which appears attractive given it is well down from its 52-week high of $15.01. My stock analysis is that Zoltek represents an above-average risk-to-reward opportunity in the equities market. Note that this is not a buy recommendation, but simply an idea.
Technical analysis shows the stock is a sideways channel just below its 50- and 200-day moving averages … Read More
The market view for gold has varied substantially this past year. This shift in the market view has also led to substantial volatility in the price of gold. Coming in at the lows of December 2011, gold was approximately $1,525 per ounce, rising in late February to just short of $1,800. That kind of volatility in a short period of time can be quite unsettling for gold investors.
Following this rapid move, the market view of gold subsided into a tighter, range-bound market. From May until the middle of August, the price of gold essentially traded sideways. This coincided with a market view in which geopolitical events complicated forecasting efforts by analysts and investors in the gold market. There was much concern that the Federal Reserve might withhold additional monetary stimulus, which kept a lid on the price of gold. With recent economic data and additional comments by the Federal Reserve, the market view has become decidedly bullish in the gold market over the past month.
Several important points are evident in the charts for gold that indicate a dramatic shift in the market view by investors. First was a break of the downtrend in late July, which was then successfully tested in early August. Essentially, the market view has shifted from bearish, in which any rally was used to sell into, to a bullish bias, in which any pullback in gold is being used as a buying opportunity.
Chart courtesy of www.StockCharts.com
This bullish market view is also evident in larger volumes on up days, as well as higher highs and lows. The next test was the 200-day moving … Read More
Investing in gold mining stocks is risky to begin with, but labor unrest is a growing problem in certain parts of the world. With gold prices continuing their move up, mining stocks in unstable parts of the world have now additional problems of workers demanding a larger share of the profits. In particular, worker unrest appears to be spreading in South Africa, on the heels of the recent deaths of 44 people at a platinum mine owned and operated by Lonmin Plc (LSE/LMI).
The latest incident occurred with a gold mine owned and operated by Gold One International Limited (ASX/GDO). The gold mine just outside of Johannesburg erupted in violence as security forces opened fire with rubber bullets into an armed, protesting crowd.
Workers are increasingly engaging in illegal strikes, demanding better pay despite existing labor agreements. Mining stocks are getting hit, as investors are increasingly looking to sell first and ask questions later. This type of violence might only be the tipping point, and we could see more sentiment moving against mining stocks in South Africa, whether investors are involved in gold or other commodities.
With protesters attacking a bus carrying workers to the mine site, security forces fired tear gas and rubber bullets to hold off the attackers. As of last check, there have been no fatalities in this incident. The real fear among investors and executives is if gold mining stocks will be pushed out for more state-owned businesses.
A statement from the South African minister of mineral resources, Susan Shabangu, was certainly not comforting, as she called on greater scrutiny for mining stocks and reported that … Read More
Gold has shown some good support and buying after previously declining to below $1,525 an ounce. The metal has rallied above $1,600 and is currently showing some promise, being on the verge of a possible breakout towards $1,700.
I continue to like gold going forward, given the massive financial distress and possible exit of Greece from the eurozone, despite recent statements from the European Central Bank and its desire to keep the eurozone intact. And then there is Spain and the other five eurozone countries currently in a recession.
Even if the yellow metal fails to hold at $1,600, I do not feel it is time to dump gold stocks and believe major price weakness should be viewed as an opportunity to accumulate.
I favor metal plays and continue to see opportunities, especially in the mining companies and junior gold miners. You want to ignore the daily fluctuation in gold, silver, and copper prices, understanding that these mining companies will continue to mine.
China and India continue to be the world’s top buyers of gold and this is expected to continue. China has also been buying mining companies around the world in an effort to increase its reserves. This is a reason why I like some of the smaller mining companies, especially those with a massive reserve of proven metals in the ground waiting to be developed and needing a cash-rich partner to get the ore out of the ground.
You can buy the major gold players, such as Freeport-McMoRan Copper & Gold Inc. (NYSE/FCX), Barrick Gold Corporation (NYSE/ABX), or Newmont Mining Corporation (NYSE/NEM), but for the real big gains, … Read More
With the recent move by Mitt Romney to choose Paul Ryan as his running mate for the upcoming election, I believe this sends a strong message to the American people and the rest of the world that the U.S. is finally going back to its roots by getting on the path to reducing the budget deficit and preventing a financial crisis.
A financial crisis usually stems from a lack of confidence. If the lenders feel that a borrower can’t pay, they sell their securities and refuse to lend unless the rates are extremely high. This is how the financial crisis in Europe is unfolding, as the budget deficit for many nations remains high. They are continuing to spend more money than they earn. Running a budget deficit for a short period of time might be okay, if a surplus is eventually generated to reduce the overall debt. This has not occurred for many years in dozens of nations, including the U.S.
Ryan understands that the real victims are the American people if a budget deficit is continually generated. This puts the country at greater risk of a financial crisis, as investors begin to lose credibility in the nation as a whole. The U.S. is fortunate that so many other nations are also poorly managed, running up a huge budget deficit and cresting on the edge of a financial crisis.
One of Ryan’s ideas is reducing government spending by 2015 to 20% of gross domestic product (GDP) and a long-term target of 15% of GDP. Reducing government expenditures is a needed step in reducing the budget deficit. Such a move will … Read More
Money is flowing out of China, according to the People’s Bank of China, which, in a report, indicated that banks in China were net sellers of 3.8 billion yuan, equal to US$597 million, in July. The significance of this is that the data suggest China’s exporters and investors may be exiting the yuan; whereas, Chinese banks have been net purchasers of yuan in the past years.
The news indicates China may face hurdles trying to pump up the economy, given that with the outflow of capital, the country will need to ramp up its government spending.
Yet, instead of following the capital flow and in spite of the fact the country is slowing, China remains a resource-hungry country that’s hunting the world for resources to help fuel its expected GDP growth in the decades ahead.
For this to happen, ample raw materials are needed.
In the oil patch, Chinese energy firms made about $48.0 billion in acquisitions in North America in 2009 and 2010, according to the International Energy Agency. China is investing in the oil-rich Canadian tar sands, and I expect to see more Chinese capital flowing in.
In July, CNOOC Limited (NYSE/CEO), one of the three major state-owned oil stocks in China, announced it would acquire Canada-based Nexen Inc. (NYSE/NXY) for $15.1 billion in cash or $27.50 per share, representing a whopping 60% above the close of July 20. I believe the deal may not be accepted by the Canadian regulators, who in the past axed deals from China when pressured by the country’s conservative government. In 2005, CNOOC attempted to buy U.S. oil play Unocal, but the … Read More
Since the bursting of the tech bubble in March 2000 and before the recent financial and credit crises struck, at least three sectors have managed to post significant gains: bonds, real estate, and small-caps. For some reason, however, gold remained under the radar for most investors. Yet, since the stock market peak, prices have climbed past many psychological marks. The shares of companies that mine the metal have gone along for the ride.
The perennial question for any gold investor is whether to buy bullion or gold mining stocks. I favor gold stocks over the higher risk of other commodity options.
While favoring gold stocks, I view Newmont Mining Corporation (NYSE/NEM), in particular, as one of the best stocks in gold, because I believe this stock will add value to your portfolio for years to come.
I’ll go even so far as to say that this stock is the only one you will need to own for the next decade, with its good price appreciation potential and dividend.
Without a doubt, for those investors looking to hedge their portfolios with gold exposure, Newmont Mining deserves to be at the top of the list. This company stands out among other players for two reasons: 1) size; and 2) low production costs.
Over the years, Newmont has grown rapidly through mergers and acquisitions, as well as the development of its existing reserves. This strategy resulted in the company’s diversified risks; namely, unlike junior producers, Newmont doesn’t depend on one or two of its mines for its future, and it is certainly not exposed to politically unstable regions.
In that regard, the risk … Read More
In early 2011, silver was the toast of the town, as speculators ran up the price to the $50.00 an ounce level on speculation that the world economies would continue to expand. But, straddled with the eurozone debt crunch and slowing in Europe and China, silver quickly fell.
The price of the white metal has steadily declined over the past 15 months. As you can see on the chart, the upward move in prices leading up to $50.00 was overextended and vulnerable to selling pressure that drove the metal to just above its multi-year lows.
Chart courtesy of www.StockCharts.com
The long-term chart of cash silver from 2003 shows the metal managing to trade above its 50-day moving average (MA) at around $25.00. The price is currently stuck below its 50-day MA of $27.76, as well as its 100-day MA and 200-day MA of $29.31 and $30.81, respectively.
Since May, trading has been lackluster. There is decent downside support around $25.00 on the bottom end and just over $35.00 on the top end based on technical analysis.
Silver is down 15.6% since the start of the year and is underperforming gold.
Yet, over the past 20 years, silver has largely outperformed gold, as shown in the following chart that indicates returns to July 1, 2012.
If the metal can hold, we could soon see another rally back above $30.00 towards $35.00. Of course, this would depend on the global economies picking up.
I would rather be in gold, which is used mainly as a hedge against risk and for jewelry.
Silver is used in numerous industrial and electronic applications; … Read More
Gold has been extremely volatile this year, with many underlying forces disturbing its flow. With the European crisis continuing, the rush of foreign funds into the U.S. dollar has placed more pressure on the price of gold. This is due to the price of gold being quoted in U.S. dollars; if the dollar moves up, all things being equal, downward pressure will be placed on the price of gold. However, another currency to watch is the Indian rupee. The reason is that Indian buyers historically are large consumers of gold. As the rupee declines in value, it makes the price of gold that much more expensive. Currently the Indian rupee continues to tumble to record lows against the U.S. dollar. Even the Central Bank of India has tried to stem the drop in the rupee to very limited effect.
This rush into U.S. dollars is coming partly based on the Federal Reserve’s lack of new monetary policy initiatives last week, strengthening the U.S. dollar and putting downward pressure on the price of gold. The Indian economy itself has been quite the weak, with quarterly growth of 5.3% for the first quarter being among the slowest growth rates in the last decade.
Not only is the entire Indian economy weakening, but many Indian companies have also always borrowed funds in foreign currencies. These foreign-currency bonds are now deeply hurting the issuing companies, as they now have to pay a far higher amount. As the Indian rupee decreases, repayments increase, which is now causing such a burden that many companies are defaulting on their foreign-currency debt. This will raise warning flags for … Read More