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The markets have been doing well. The S&P 500 has now soared beyond the July highs of last year. As I said before, I wouldn’t be surprised to see the market shock us with gains in the short term (see The Last One Standing.)
But don’t be so quick to think that everything is back to normal. Things won’t return back to normalcy for a long time. There is going to be some major economic restructuring around the world before we can expect a normal market.
For the past few weeks and beyond, I have talked about Europe and the US flooding the world with new money. Just last week, the International Monetary Fund called for a another $600 billion to limit the fallout from Europe’s debt crisis. It had already requested $500 billion two years ago.
Europe has already pledged to inject $200 billion but that still leaves another $300-400 billion to meet the IMF’s call. The US has already said it has no intention of adding more funds, considering its own problems at home. But as Europe’s debt crisis is widely seen as the biggest threat to the global economy, don’t be surprised if the US finds a way to create a few hundred billion to add to the cause.
While the markets have cheered the reports of the IMF’s request of funds, the IMF still needs to acquire those funds in order to keep the markets happy. The market is a finicky child that can be made happy with the thought and excitement of something happening. But at the end of the day, something has to happen for the markets to keep up. Right now, there’s nothing new.
In order for the markets and the economy to continue what appears to be an uptrend, it’s going to need more money. More money means more debt. And more debt means a growing inability to service it.
A debt saturated society cannot grow. As debt servicing grows by the day, the economy losses steam unless more cheap money is available and more printed money is released. But this just adds more fuel to the fire.
In the US, you can get 30-year fixed rate mortgages for less than 4% – even with 2.2 million homes already in the foreclosure process and another 13 million homes with negative or near negative equity. There are car dealers offering 0% financing with nothing down for 60 months and furniture stores offering 0% financing for nearly the same with no payments. So while current economic numbers appear strong, they are a result of incredibly cheap capital which cannot be sustained. Banks are willing to take big risks because the Federal Reserve provides the banks with 0% funding, knowing the government will be there to bail them out if it blows up.
The Fundamentals are Simple
The fundamentals of the market are very simple. Based on what is required of the world governments to avoid complete chaos, gold and silver will continue its ongoing 11 years of consecutive positive returns. While the day-to-day price discovery of gold and silver will continue to be manipulated in the paper markets, the overall longer term trend is that gold will rise beyond $2000 and silver beyond $40.
I continue to favour gold and silver stocks, but also uranium stocks as I mentioned earlier last year (see Back to Reality). While the uranium sector has shown us little action, this will eventually change. There are screaming bargains out there for many of the uranium stocks and given the increasing demand of uranium, there will be no choice for the stocks but to move up. If you can stomach the market, stay the course and add to your positions.
While it may seem that precious metals and uranium stocks will never move back up, have faith in the psychology of the market. The smartest investors will tell you the best time to buy stocks is when nobody else wants them – especially given the current market climate where the fundamentals of gold, silver, and uranium are so incredibly strong. Investors don’t want these stocks right now because of the volatility in the market and the disconnect between the stocks and their commodity counterparts. Yet, here we have a situation where people don’t want precious metals and uranium stocks even when the fundamentals behind many of these deals scream buy. These fundamentals are only getting stronger.
This is a great buying opportunity. Load up.
Disclosure: I am long gold and silver through ETF’s and bullion, as well as long both major and junior gold and silver companies.
Until next week,
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