The performance of the US stock markets last week reflected the current perception of quality - the Dow Jones Industrial Average (the bluest of blue chip-safe stocks) fell 5.0% last week. The broader-based S&P 500 fell 6.2% and the tech-laden NASDAQ was off 7.9% (see table below).
European and Asian stock markets did not perform any better. China’s stock market was the exception, advancing 13.6% for the week. China announced $586 billion in economic stimuli so far this year, a bailout amount second only to the USA's. By way of comparison, China’s stock market is off 62% since the start of the year versus the S&P 500, which is off 41% for the same period.
Gold closed at $742 an ounce for the week, up 1%. Silver fell 5% to $9.49. In this week’s edition, we present the Quote of the Week early. In the current issue of Barron’s (November 17th), Alan Abelson offers this ‘nugget’ on precious metals:
Gold is a no-brainer. Our thesis is as simple as it is unoriginal: Virtually all of the civilized world and a good chunk of the uncivilized world is in a race to see who can debase its currency the fastest. The big spur here is the great global bailout and the trillions in paper money being the baling instrument of choice. We can’t think of a better way to take advantage of this frenzy of financial free-fall than stowing away a few nuggets.
As indicated in the table below, gold and silver are currently $742 and $9.49 an ounce. By this time next week, with the Barron’s stamp-of-approval, we could see gold firmly over $900 an ounce and silver firmly over $12 an ounce.
“Barron’s is giving us the investment conclusion” says Jonathan Cavuoto, President of First National Bullion. He adds “The reasons we get there are due to (1) the continuing decline in the housing market; and (2) rising unemployment. Falling housing prices not only frustrates sellers but also discourages would-be purchasers, who now think prices will fall further, postponing the purchase decision. Rising unemployment makes those who still have a job more cautious. Again, the purchase decision is delayed. All of this erodes consumer confidence, and in times of such uncertainty, physical ownership of gold and silver provides more than just a store of value but also a potential source of investment income.”
To give some back-up data to this quote, the undisputed authority on housing values is the Case-Shiller Index. You can do this research yourself --- here’s the link. The Index was assembled so that January 2000 represents 100…and is the start of the run-up in housing prices. By July 2006, that Index stood at 232…meaning that nationwide, housing prices were 132% higher than in January 2000.
As illustrated in that link, this Index has been in a free-fall since its July 2006 peak, a free-fall similar one Mr. Abelson mentions in his Barron’s column. As of August 2008, this Index declined to 164. Going from 232 to 164, this Index is telling us statistically that more than half of the gain in housing value since January 2000 was eliminated (i.e. 68-percentage points of the 132 percentage point gain has been lost). If this Index remained at the 130 level for a few consecutive months…this may be the best bellwether to use as a guide to some stability entering the housing market.
Developments on the supply side are helping --- the US Dept of Commerce announced that housing starts were 817,000 last month, the lowest level of housing starts since January 1991.
Our last quote comes from Martin Feinstein of Harvard University. He was responding to the question, on Bloomberg News, “What happens if no government initiatives get enacted before the January 20th Inauguration of President Obama?” He said
If that’s the case, this recession is just going to get worse. We’ll see higher unemployment, worsening confidence, cut-backs on business spending (such as reduced inventories, capital spending…and at this stage, the second round of lay-offs). It’s really important to see some fiscal solution to deal with this on-going downward spiral in housing prices which drives the downward valuation of mortgage securities. Action now means we may look for recovery by March. Fiscal actions after January 20th would delay the recovery for 6 months.
It's unlikely there will be any decisive moves to influence the stock markets or stabilize the real estate markets for a few months. What better time to focus on precious metals?
