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Financial Fitness & Life Planning

Shakeout

Precious metals and related investments had a second consecutive frustrating month. The situation in Greece caused the Euro to decline, which perversely translated to dollar strength and metals weakness. 
 
Greece is extremely small relative to the global economy, and yet the very real possibility of a near-term default gripped markets for good reason. Greek debt is primarily owned by European banks. Trouble with those institutions could lead to a repeat of the global credit crisis. The prevalence of credit default swaps further magnifies and multiplies the Greek crisis to a significantly larger scale. It is also troubling to note the heavy presence of European bank debt in US money market funds. Finally, there is the issue of contagion. It is obvious that Greece is only one of numerous insolvent European nations. Eventually the day of reckoning was once again delayed via a taxpayer-funded bailout. Greece will surely need yet another bailout at some point, and while the stock market celebrated, it only further underscored to me the importance of gold and silver as these bailouts ultimately are provided via currency depreciation.
 
Recent economic indicators have been weakening even before the conclusion of the second round of quantitative easing. Public backlash against both fiscal and monetary stimulus has rendered both of those options off the table for now. Without the artificial government intervention to which the economy has become accustomed, the strength of capitalism alone may not be enough. Indeed the government has already taken the bizarre step of releasing oil from the Strategic Petroleum Reserve. Ignoring the fact that such an action is only supposed to occur in the event of an emergency, it was a clever attempt at further stimulus in the absence of fiscal and monetary options. It is important to recognize that even in the absence of further quantitative easing, the Fed’s balance sheet is still swollen and zero interest rates are still in effect. Furthermore, if the economy continues to slow and/or the stock market suffers a correction, I believe the Fed will jump in yet again with more easing, but likely with a more surreptitious name.

With silver way down over the last two months and the gold mining stocks being pummeled, gold itself has held up very well. Often when a category of assets suffers a pullback, the highest quality assets are the last to go down and the correction is not complete until that asset too has capitulated. In market technicians’ parlance, gold is overbought while silver and mining shares are oversold. For this reason, combined with the Fed’s putative exit from quantitative easing, I anticipate near-term weakness in gold as it plays catch up. Such commentary, however, does not represent any shift whatsoever in my long-term outlook.
 
Michael H. Berlin, CFA, CPA, is the founder and portfolio manager of MHB Equity Partners, a value-oriented private investment partnership. He previously worked at Lehman Brothers, and before that at Ernst & Young. Mr. Berlin holds an MBA from Columbia and a BBA from Michigan.
 
 
The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.
 
 
Michael can be contacted at mberlin@mhbpartners.com and at (631) 629-4928.
 

Today is: November 22, 2017 - 8:36pm
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