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Investments' and markets' update

Posted by jdavis on January 25, 2011


On 16 November, we wrote the following: “So, what do we expect?  A mild correction in commodities and stocks taking, for example, gold back to $1250 - $1300 from $1420 (around 10%)… Then, it would appear, we will have a final surge in markets into the first half of 2011…and gold to go just above $1500.”

We did not elaborate as to how this would affect gold stocks however inevitably, if it played out, gold stocks would be hit similarly or more. And then rise once again into 2011.

Gold has fallen to $1325 as I type.

Kindly consider the pull back we have just experienced in gold and silver stocks: Gold stocks' index - 6 months
This shows a c 15-20% fall over just 6 weeks (4 if you dismiss the festive fortnight).

Now, the index, touches the 200 period moving average which is significant.  In my view, the gold stocks may have had had their pullback, for now.

(It is just possible, we are also experiencing a c 10% pullback in the wider stock market.)  Our view remains that gold could rise to above $1500 this year.

To remind you, our favourite commodities are precious metals and agriculture.

The two funds we use for specific exposure to these are the Ruffer Baker Steel Gold fund and the Eclectica Agriculture fund.
Both of these have experienced small corrections from their very recent highs of c 5-7% at the time of writing.  Fund fact sheets (as at 31 December) attached.

We are long term builders of precious metal and agricultural fund holdings, however we do not like to buy (anything) at highs or as prices rise unless there is a very good reason.  Indeed, we also divested of some gold holdings during 2010, after a spectacular rise of 200%+ in the fund since late 2008.

A fall of 15-20% in gold stocks makes a very comfortable buy point, on a long term basis.

Similarly, there are excellent prospects for agricultural stocks, as we have written previously.  (Hence we see food riots globally! Already at least one government/dictatorship has been kicked out – Tunisia (though not with much real change so far).  Jordan and Egypt are experiencing riots too.  Praise be for the internet – until they ban it like China does with many sites.  [As an aside, Newsnight last night noted that in Jordan you can be thrown in jail for simply criticising the King.  Nice country.]  Are Arab non-democratic rulers finally getting some semblance of a comeuppance?

If you know anyone who is, literally, starving – and there are hundreds of millions – tell them to thank Ben Bernanke (Chairman of the Fed), Wall St/Canary Wharf and the EU in Brussels ie France and Italy (the Common Agricultural Policy).  It is nothing to do with food production.  In fact, globally, we produce enough for twice the world’s population.)

Therefore, I am recommending a small increase in gold and agricultural holdings to most portfolios, as appropriate with regards to client acceptability of volatility.

I ought to say, though, it is entirely possible, commodities will be hit hard in 2011 if the wider markets collapse (like 2008).  However, as we believe these assets are on a long term rising trend, I’d rather buy intermittently at intermediate lows than always try and find thee low (if only that were feasible).

Questions we always pose in these considerations:

  • Can they continue falling?  Of course.
  • Is it more likely than rise from here?  No.
  • Is it more likely, in a reasonable time frame, they will be higher than they are now even with further falls?  Yes.
  • If they fall further, would I be a seller or a buyer?  A buyer at even more attractive prices.

Individual clients will be emailed directly over the next couple of days.  Kindly respond at your earliest convenience.


No doubt you saw the ‘shock’ fall in the UK economy in Q4 2010.  The expert forecasters/commentators (oh, please!) forecasted growth of 0.5%.  The turn out was a reduction of 0.5% - a large difference.  Apparently, it was cold so people didn’t buy anything for Christmas…

The fall is such a surprise to everyone who comments on these matters.  Well, not everyone…as you have read my commentaries/forecasts.  Er, haven’t we rising unemployment, taxes, home repossessions, bankruptcies etc?  These are the facts, not dreamy pretences.  We are in the hangover of the biggest orgy of debt and spending in history.

Let me remind you, historically, after a recession, without huge stimuli, the next year normally sees a bounce of c 3-5% GDP growth. After the 2008/09 recession, with gargantuan stimuli, we have seen c1-2% growth from a big fall (biggest since 1930s).  We are not in ordinary times in our view.  We believe we are in a 20 year depression, like Japan – unless the government changes tack.  It needs to do the following:

1. Split retail banking from investment banking
2. Let bankrupt banks go bust
3. Cut public spending aggressively (its lame so far)*
4. Switch taxation from productive areas (income, capital gains and corporate) to unproductive (houses)

Until and unless it does at least 3 out of these, the economy will drift down for years and years (perhaps decades).  Japan has experienced this for 22 years and counting.

My route to growth will incur a short sharp shock to the economy.  Better that than 20+ years of pain, in my book.

*Edinburgh council staff spend £185/m phoning…the speaking clock. Symptomatic of massive public sector waste – our money!


The markets’ reaction to the fall in UK GDP was entirely appropriate.  Sterling sold off hard against the US Dollar as expectations of interest rate rises diminished immediately.  USD continues to show signs of strength i.e. confirming fragility in stock markets.  Those whom we advised to move into the dollar should remain there for now.  It is not very clear how it will develop however clarity is coming.

Recently, there has been much talk of rate rises in the UK.  While we are in Depression it will be unlikely that rises will be permanent. Japan tried raising rates a few times and they promptly came back down again.  I remain in the camp that, though we have inflation of c 4%, and it can go higher this year, it will fall going into next year as the economy continues to falter.

In 2008, RPI reached c 5% then fell to just over 1% by 2009.

Remember, the economy is not run by The Fed but the market is. (As it were.)


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