Monday, April 8, 2013

Bearish on Gold, Stocks

I have sold more than half of my gold and silver holdings. I am bearish on gold right now, and I think the recent declines can go to $1200.  I am keeping my long-term holdings in gold but selling my short-term holdings.  I will get back in if the current declines stabilize.

The reason for the current declines seems to parallel the declines in the 1980s and 1990s.  When the Fed expands the money supply, part of the credit expansion is borrowed by commodity producers, who expand production.  Because commodities are fungible, expanded production goes directly to increasing supply, hence reducing price. When price declines cause shakeouts in the market, the price stabilizes, but the producers no longer have access to easy credit. Then the cycle renews.  I learned this concept from the late Howard S. Katz.

Unlike earlier cycles, the Fed has imposed a massive monetary expansion, a fresh cycle, on top of the intermediate stages of a bull market.  It is impossible to know how far the gold price will fall, but I  doubt that the current weakness in the gold price will continue for 20 years, as it did from circa 1982 to circa 2002.

I am also gradually selling stocks.  If you have been following the stock market, we are more or less at the peak that provided resistance in 2000 and 2007.  The massive Fed stimulus might change the real values of the peaks so that the current upswing can go further.  The recent news that the Japanese are going to buy assets around the world with counterfeit yen also may help perpetuate the current rally to new highs.

Are American grandmothers going to cash in their CDs and buy stocks?  Are the Japanese going to pump up the US stock market for more than a year?  I am dubious.  I am holding my high-yield securities but gradually selling my index funds and going into cash.  If there is a market correction, I aim to get into natural gas tankers and energy MLPs. I have a number of MLPs now (about six percent of my portfolio is currently in MLPs, including Kayne Anderson, Clearbridge, and Neuberger Berman), and I want more MLPS and natural gas tankers.

5 comments:

Anonymous said...

http://www.bloomberg.com/news/2013-01-22/billionaire-fredriksen-winning-as-lng-tanker-rates-drop-freight.html

Anonymous said...

What is a MLP? What are the tax consequences of an MLP?

Mitchell Langbert said...

MLPs are tax-favored partnerships that invest in natural gas pipelines, depots, and other energy-related infrastructure. They are taxed so that distributions are treated as return of capital. Once the capital is returned, they are taxed as, I believe ordinary income or capital gains. Consult your tax adviser for information on the tax technicalities. They issue a K-1, not a 1099 or W-2. They have been paying a good return, and the ownership of natural gas pipelines seems to be a strategic investment. For more information look at the investments like Kayne Anderson, Neuberger Berman, Clearbridge, and many others.

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