There are bull markets everywhere right now. But not all of them have integrity.
The bull market everyone knows about is in stocks. Since March, aside from the odd correction along the way, stock markets around the world have kept going up.
The FTSE is up 41%, the Dow Jones is up 45%, the main European stock markets, France and Germany, are up 48% and 52%. Look at the more racy emerging markets and the gains are even more impressive. Egypt +91%; Peru + 117%; Kazakhstan 129%.
But why are stock markets going up? They’re going up because people believe that that world economic growth is back on track – that the recession is over. But there’s no solid proof of that.
In fact, according to one UN trade ‘think tank’ yesterday warned that “the current financial market rebound is not a “real recovery” and that any world economic growth recorded in 2010 was unlikely to exceed 1.6 percent.”
This is not a real recovery
Supachai Panitchpakdi, secretary general of the United Nations Conference on Trade and Development (UNCTAD) said: “The depth of the recession has been so important that of course there will be a rebound ... but we still do not see that this is a real recovery.
“The actual increase in the commodities prices is mainly driven by appetite for more risk,” he added. In other words, these stock market gains that we’re seeing – from the UK to Peru – are built on punters’ speculation. And as the UNCTAD spokesperson said, this appetite could also be “reversed at short notice, depending on the pace of recovery and financial market sentiment.”
The think tank’s Chief economist, Heiner Flassbeck, said that “the markets had been fuelled by financial speculation that in turn was driven by expectations of recovery. He claims ‘anticipation of recovery is just a fiction, it is not there.’
This makes sense. As colleague, Dan Denning at The Daily Reckoning, explains, “you cannot correct the global imbalances of a leveraged boom with more leverage.
“But let’s tackle one specific aspect of the report that suggests commodity prices may again be the subject of financial speculation. Is it true?
“Frankly it’s hard to say. We’re more confident that profits in the real economy – once you take away the effect of credit and government money – are regressing to an historic mean. Some companies will make more. Some less. But the average will be lower.”
And that means that stock prices should move lower, too. There is no real integrity to the massive stock market rallies that we’re seeing.
So which of the bull markets are worth buying into? The ones that are better placed to preserve your money in an inflationary environment – think hard assets like metals, energy and agricultural commodities.
Oil’s been in a substantial bull market that’s driven the price up 125% since February. You could argue that if the recovery in the world economy is not for real, then the oil market is under threat, too. Yes and no.
Yes, if growth stalls and leading economies like the US and China head into a deeper recession, then for sure oil demand will slump. That would be negative for the oil price.
But we still have the ongoing supply side challenges with oil. We still face a massive problem with the rapid rate at which existing oilfields are being used up. Not only that, but even when we get a new discovery – like the huge find by BP in Brazil recently – it takes a long time to bring this new oil on stream.
And above all, there was vastly inadequate investment made by the oil industry in the lean years. So the infrastructure for getting oil to market in an efficient manner is just not there. That means the oil price is likely to be supported, with or without a return to global economic growth and so there’s money to be made in oil.
The most exciting bull market of all
But let’s talk about the most exciting bull market right now: the bull market in gold. Gold has finally broken above the magic $1,000 an ounce level today. That’s a massive psychological level and one that traders have been battling over since it was last above there in March last year.
Whenever the gold price has approached $1,000, sellers have driven the price down. They’ve overcome the buyers. But it was only a matter of time before there were fewer bears left to sell. The fact that gold has now made it above $1,000 suggests that the bears are being gradually worn down.
Of course, it’s not over yet. It’s highly likely that the gold price will come back below $1,000 again in the next few days. In fact, the price really needs to stay above this level on a closing basis in all major time zones – London, New York and Tokyo – for this move to hold. The longer period the better – so a weekly close would be a stronger signal than a daily close.
But this has to be a positive sign for gold. There’s a desire to see gold higher. There’s a real threat of inflation and that will underpin it. There’s a lot of money that has been waiting on the sidelines to jump in if it broke the $1,000 barrier. That money could be ready to crash into the market just as soon as gold looks like it is holding the $1,000 level.
All eyes are on that $1,000 price. You should be in gold already. But if you’re waiting for confirmation, then look where it ends the week. If it can hold this level, it looks like it’s going higher. This could be gold’s big moment.
Good investing,
Frank Hemsley
For The Right Side
P.S. If you’re looking for a way to play the gold market, you should read the just-released report from MoneyWeek’s ‘Gold Insider’, Dominic Frisby. He’s discovered 6 stocks that have the potential to double your money at least. But you need to be quick – they’ve already started to move. If gold holds the $1,000 level, these could fly. I urge you to take a look here.
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
