Market Overview
by Puru Saxena
Editor, Money Matters
December 24, 2009

Global stock markets are staying firm and over the past week, major indices in the West have outperformed the emerging markets. This transformation is due to the strengthening American currency, increased debt concerns and the repatriation of capital from the developing nations which are still viewed as risky plays. In any event, the market rally is still intact and we expect higher prices in spring next year. Remember, monetary policy is extremely loose all over the world and central banks are printing copious amounts of money. This monetary inflation is supportive of asset prices and contrary to popular opinion, total debt in America is still expanding. It is notable that the US Treasury is taking on huge amounts of debt and this is more than offsetting the debt contraction in the private sector. This is inflationary.

If our assessment is correct, the recent stock market pullback in the developing markets is a routine correction and we suggest that you increase your exposure to China, India and Vietnam. Before the end of this business cycle, these markets should be much higher.

Over in the commodities arena, the price of crude oil is rallying in the face of a strong US Dollar. Once again, this goes against common wisdom which was claiming that oil was only rising due to a weak greenback. The reality is that the price of crude is rising due to monetary inflation and long-term supply and demand dynamics. Make no mistake, ‘Peak Oil’ is real and it will underpin the price of crude oil. If the global economy improves next year, we could see oil trading above US$100 per barrel. Accordingly, we are maintaining our heavy exposure to upstream energy companies and the service providers. Furthermore, we are also holding on to our positions in the alternative energy patch. Long-term investors should stick with their positions and perhaps allocate more capital to the alternative energy sector.

As far as metals are concerned, it looks as though the correction in gold and silver is almost complete. Two days ago, the price of gold touched US$1,075 per ounce and we see support in that area. Therefore, we suggest that you consider adding to your positions in gold bullion and aggressive investors should look at buying more shares in the miners. Similarly, the price of silver is trying to carve out a correction low and we suggest that you hold on to your positions. Remember, we are witnessing an epic bull-market in precious metals and the euphoria stage lies somewhere ahead. It is worth mentioning that unlike a boom in financial assets, a bull-market in precious metals is based on fear and fear is more powerful emotion than greed. This is why we expect this boom in real money to end with a bang. Before the show is over, we will witness total distrust and fear with regards to paper money and the price of gold will rise exponentially. The end of the bull-market in precious metals will coincide with very high inflation and surging interest-rates. Furthermore, at the top of the gold boom, we expect the Dow/gold ratio to decline to below three. Needless to say, we are nowhere near the end of this bull-market.

Over in the world of currencies, it looks as though the counter-trend rally in the American currency is running out of steam. Yesterday, America’s housing data was dismal and this put some pressure on the US Dollar. In the near-term, the bear-market bounce in the greenback may continue. However, apart from the European currencies, we do not envisage a lasting rally in the world’s reserve currency. As long as the US Dollar Index trades above the 77 level, you should keep your cash in the US Dollar but if that level is breached, consider buying back the Canadian and Australian Dollars.

Finally, in the poorly world of government debt, long-term interest rates are on the rise. This action is in line with our expectation and we forecast even higher rates in the following months and years. As we have said before, we have no intention of lending money to bankrupt governments and we would not buy government bonds, not even with your money!