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Gold, U.S. Dollar and Bonds Set the Stage

Stock-Markets / Financial Markets 2010 Nov 08, 2010 - 12:06 PM GMT

By: Jim_Farrish

Stock-Markets Best Financial Markets Analysis ArticleThe market made the move through resistance at the April highs. Now what? The headlines have been full of opinions relative to the economy, the dollar, metals and geopolitical issues. One thing is certain about money, there is never a shortage of opinions. The challenge comes in filtering through the noise and looking for the opportunities. When I started investing money a mentor told me a quote he had learned, “stocks never sell for what they are worth, but what people think they are worth!” It is still on my desk as a reminder that no matter how smart you think you are, the reality of stock prices boils down to opinion.


Some believe stocks are overpriced, overbought, due for a pullback, etc. Others believe they are cheap based on forward earnings, undervalued, or a great opportunity, etc. Based on the wave of opinion each side will be right eventually. The challenge remains in implementing a disciplined strategy based on your goals and opinions. The most successful investors over time are those with conviction to follow their discipline towards managing money.

With that in mind, what is the market telling us? The current wave of opinion is being driven by liquidity from the Fed. The influx of free money is driving commodity prices in the metals. The chart below of GLD, SPDR Gold Trust ETF shows the rise in price from December 2008 has doubled. The flow of money towards the precious metals has been a play on inflation fears as well as a currency alternative. The wave of public opinion is for the price of gold to continue to rise. Remember an investment is worth what people think who are willing to buy, thus define a disciplined approach to investing if you don’t already own the metal. Consider other options such as the miners of gold. GDX, Market Vectors Gold Miners ETF has benefited in the move higher in gold. Consider alternative metals or a fund that combines them all into one (DBC). Have a disciplined approach before jumping into metals.

The dollar has been crushed by the Feds activity of free money. The chart below of the dollar index shows the roller coaster ride the greenback has been on over the last couple of years. The current test of support near the 75 level is the question. Do we hold support and bounce back towards 78.40? Do we move to the lower trading range on the chart of 71.40 to 74.20? Again, the public opinion is lower on the dollar. The contrarian in me wants to say we bounce first and test the range of 75 to 78.40 first. Why does it matter? Commodity prices such as oil will be impacted by the dollars direction. A stall in the dollars decline would be beneficial across the board for equities. The dollar is on my watch list for direct opportunities as well as the ripple effect.

Bonds are creeping back into the headlines relative to being in a bubble that is ready to pop. Again the opinion meter is important, but managing your money is the name of the game. The chart below is the yield on the thirty year Treasury bond. As investors we know, when yields rise, bond prices decline. Thus, the current risk in the bond market starts with rising rates. You can see since hitting a low in August at 3.5% the yield has moved north to 4.12% currently. This is another area worthy of our attention. If yields continue to rise the impact to bonds will cause an erosion in principle. It will also impact other interest sensitive investments. If the public opinion continues to be positive towards the economic outlook money will exit bonds and find its way toward equities. If you are bond holder you should track the risk of your positions and set you stops accordingly. Some bonds are moving lower (Treasury bonds) faster than others (corporate bonds). Be aware of what is impacting your assets. If the bubble is to pop, the economy will have to show more strength/growth than is currently being displayed.

As investors we have to be aware of our surroundings. Review the opinions and make a list of the potential impact. Let them develop before you act. Manage your money based on your discipline and focus, not the headlines or talking heads.

Jim Farrish is the Founder and Editor of SectorExchange.com and TheETFexchange.com.  His primary goal is to educate people about investing.  He has taught workshops locally and nationally for over 25 years, teaching thousands of individuals, business owners, and advisors how to focus on achieving financial independence.  Jim Farrish is the CEO of Money Strategies, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Money Strategies, Inc., web site.

© 2010 Copyright  Jim Farrish


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