The Big Yawn

The big drama last week was the tax deal. Looks like we have another two years of the same tax regime. The markets should have rallied sharply on the news, but they didn’t. As with most “sure things” the market had already priced in the high probability of the status quo continuing. All major indices did set new 52-week highs during the week but failed to hold on the day they were set. Still, we’re better off for now. The alternative is never pretty…unless you are short of course.

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Gold and silver continued to surge as well, with silver trading over $30 per ounce and gold heading over $1,400 before pulling back. Interest rates, as measured by the 30 year Treasury bond also increased, as they should have. I am shocked that they aren’t higher. Investors in fixed income securities are probably the most vulnerable right now after a 10- year bull run. Interest rates should continue to move higher despite the Fed’s attempts to keep them low. The question is whether they will sprint higher or crawl. Right now the turtles are in command. It should come as no surprise to anyone if rates do move higher. Investors will begin to demand a higher rent for their money as bond prices, especially those issued by the Treasury, begin to move lower. It’s a supply/demand issue. More supply equals lower prices and lower prices for bonds equals higher yields. Of course, the government could just stop printing money…yeah, right!

Where to Put Some Money in 2011

Speaking of money…

Currencies will be the major story of 2011. The dollar will probably strengthen against the Euro as more Sovereign debt issues come to the forefront. Buying the Euro above $1.30 is probably a mistake as we could see it trade down to the $1.20s or lower. Under $1.20, it will represent an opportunity. However, there are much better opportunities out there and your focus should be way outside the norm when it comes to your conventional thinking.

In past years when one wanted to diversify out of the dollar it would be to the Euro, Yen, Pound or Swiss Franc. Other currencies like the Aussie Dollar, Norwegian Krone and even the Canadian Dollar have a place too, but they are quite small players prone to excessive volatility when things go wrong in the respective countries.

Still, your focus should change completely going forward. Your focus for 2011 and beyond should be in Asian and South American currencies. For the first time in decades it has become easier to buy these currencies through ETFs, especially those issued by Wisdom Tree.

Why buy Emerging Markets currencies? Good question. Sure, there is the risk of volatility, but it’s also where opportunity lies. Consider this, a country’s currency is usually a good measure of investor sentiment about its future. After all why would you want to buy a currency of country that is not growing, has structural problems, is printing money etc…when you could buy a currency in a country that is raising interest rates to stem growth, is not printing money, and is growing its GDP at 6% or more? Well the answer is staring you in the face. If you want your money to be worth more money, sometimes it pays to have some of your money in places that are growing regardless of what your comfort zone is. So, take this opportunity to look at currencies like the Brazilian Real, the Chinese Yuan, the Indian Rupee, the Chilean Peso, the Israeli Shekel…these are the currencies that will strengthen for the right reasons!

Did I Mention Printing Money…Again

Funny how two weeks ago the “Deficit Commission” was touting its success at identifying the perils of a growing deficit and national debt. Nothing new here since we all are acutely aware of how much our purchasing power has decreased in the past 30 years. The commission needed 14 out of 18 of its members to ratify its findings in order for those findings to make it to the floor of Congress for discussion.

For a while there it looked like things were going to get interesting. Eleven members did sign on, but that just wasn’t enough. So much for getting serious about the deficit. Well, at least they didn’t agree to print MORE money. Oh! Wait. Just a few days later, the administration in its agreement with those deficit cutting Republicans agreed to increase unemployment insurance for a further 13 months and leave taxes where they are, and reduce payroll taxes by 30% (not the 2% they are talking about to make it sound smaller). Did you catch that last part – 30%. The tax will go from 6% to 4% for a year…2% sure sounds better.

In total this new attack on the deficit plan by both sides will add about $300 billion to the debt. It’s a damn good thing they didn’t ratify the deficit commissions ideas…they would look even more two-faced than they already are. Just pathetic!

Gold and silver are getting ready to present you with an excellent buying opportunity. Both metals look to be in a beginning phase of a correction. Make no mistake this correction, if it continues, is not a structural correction like when the market trades at 30 times earnings and correct to 20 times or something like that. The metals have moved up in a straight line since early 2009. Just from a technical basis the metals are overbought in the short-term. The long-term however has never looked brighter, especially for gold. If you need any evidence of where gold is headed, just read the paragraphs above.

Best Regards,

Kevin Raymond

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