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Saturday, Dec. 27, 2014

The Year Ahead

Posted Monday, December 31, 2012, at 1:28 PM

 

 

What will the New Year bring?

The fact that my crystal ball has been broken for decades won't stop me from making guesses.

Last year, I figured that buying silver might be a good idea. If the dollar declines in value, silver has a greater relative appreciation rate than gold and other investing and saving vehicles.

Gold started the year at $1600.00 and finished at $1650.00 with two peaks at $1800.00 and a protracted dip to $1550.00. To me, gold still looks good. However, I expect it to trade "sideways" most of the year.

Silver started the year at $28.50 and finished at $30.25 with peaks at $37.50, $35.00, and $34.50 and a protracted dip to $27.00. To me, silver still looks good. Again, I expect it to continue to trade sideways for most of the year.

Last year, the DOW Jones Industrial Average started at $12,287.00 and finished at $12,938.00. The highs topped $13,600.00 and the low touched $12,100.00. My guess is continued volatility with large gyrations. The market P/E is now 15.69, which is a reasonable multiple, but still feels high to me for a slow economy. That said, people who are paid for their opinions on the stock market think that the market would be trading at a much higher multiple if there were more economic certainty.

The performances of these markets for the past year are: silver brought a return of 6 percent, stocks 5 percent, and gold 3 percent. Last year's guess about silver was correct, but only barely.

My guess for 2013 is that the best returns will be on investments in high capacity ammunition magazines and rifles like the AR-15, AK-47, and the accessories, which decorate them. Prices are already on the rise. Clearly, however, this is not a retirement investment but an opportunity for short-term profit based on pending legislation.

My hunch is still on silver for the year ahead. Gold will probably rise, but not at the same rate. The stock market is a pure wild card. However, I am pessimistic on the economy and believe that profit shifting to 2012 to avoid 2013 taxes and the new healthcare taxes will weight heavily on quarterly reports.

Where has the inflation been hiding?

The Federal Reserve has been pumping a minimum of $40 Billion per month into the money supply all year. According to economist, Arthur Laffer, money market accounts and cash savings in general have declined precipitously. Rather than chasing goods and services, creating inflation, this cash has been migrating over seas avoiding U.S. taxation. Mr. Laffer expects a substantial jump in inflation in the next four to five years as monetary policy catches up with us.

I am not an expert. I am merely a fool living in Brazil, Indiana who has semi-passively watched the markets for the last 35 years. In my observations, whenever investors are convinced that there is a new paradigm in a market, bad things are just around the corner. The experts think that the new normal for the stock market is a higher P/E and that massive money printing is needed to keep the economy going. Consider yourselves warned.

Over the long term, I conclude that investment commodities like gold, silver, copper, oil, etc. and real estate are likely to rise substantially over the next four to five years. They will tend to maintain relative value to sacristy against an inflating dollar.

With inflation, stocks are also likely to rise apace with an inflating dollar. But there are additional factors weighing on the stock market. The market P/E only recently came down from a high of 123.75 in late 2009. The historical average is 15.45, a little less than today, but our economic growth rate of 1.5 percent today is roughly half of our 100 year average growth rate of 3 percent and one percent growth rates appear in the future as far as the eye can see.

My take is that the "experts" are still influenced by the recent P/E highs and see a market being held down. While in the short term, this is likely true; it is unlikely to be sustained over the long term. While the stock market will probably rise, to me it looks less likely to rise at the same rate as investment commodities.

One prediction you can count on for sure is that if I guess right, you will be hearing about it from me again and again. If I am wrong, I will only mention it in passing upon the next New Year.



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