Dear PGM Capital, Blog readers,
In this year end blog edition we want to look back to 2013 and will try to provide you with an Outlook for 2014.
It seems like only yesterday we were ushering in 2013. Now, the year is almost gone and a brand new year will begin in just a few days from today.
INTEREST RATES:
One thing is sure: 2014 will bring with it both opportunities and dangers — and right now, it’s clear that, among the most certain opportunities, rising interest rates will become the key driver for all economic events and market movements in 2014.
Since 2009, the low-interest-rate policies of western central banks, (FED, ECB, Bank of England and Bank of Japan) have inflated the ultimate bubble in bonds. Over the past four years or so, more than US$ 1.4 trillion has flowed into US-Treasuries — nearly twice as much as the money that created the great tech stock boom of the 1990s.
As can be seen from below chart, since May of this year we see a great exodus — hoards of investors beginning to stampede OUT of the bond market and INTO other investments, including stocks, and soon, gold.
As can be seen from below chart, in 2013 interest rates rose from a minimum of 1.63% on May 2nd, to 3.01% on Friday December 27, 2013; an increase or 84.7 percent.
Due to this some Investors will be asking themselves,
“How much higher could interest rates go?”
The problem with most people is that, based on greed and fear, they have a short memory and due to this have forgotten the period of 1979 – 1985, in which the yield of the 10-year-note was above 10% and that the Ten-year Treasury rates peaked at 15.8 percent in the summer of 1981—a level unbelievable in 1950 and again unbelievable now, but the reality in the aftermath of the runaway inflation of the 1970s.
Ladies and gentlemen, rising interest rates means plunging bond prices. We believe that due to the FED’s tapering and increasing USA Debt, even more money will flow out of bonds and into stocks and other investments in 2014. The problem in this, is that rising interest rates will increase the borrowing costs for business and real-estate owners. Due to this we believe that rising bond yields in the long run, will have a negative effect on the stockmarket too, as well as the real-estate market and that Gold, Silver and other precious metals, similar with the period 1977 – 1981 will be the only safe haven for investors.
GOLD:
- The USA is dead broke:
Although Washington reached a budget deal, enabling the USA federal government to stay in business through 2016, congress didn’t agree on any meaningful spending cuts. Meanwhile, the USA still has over US$ 200 trillion of total debt, including unfunded pension liabilities and more. It will be impossible for Washington to ever make good on all those liabilities; not even on one-quarter of it. So no matter what, sooner or later the USA will find itself on the edge of default once again. And when it does, there will be no kicking the can down the road anymore. - Built-up inflation:
Everyone knows inflation is higher than what governments are officially reporting. - Washington and Brussels want your money:
Because leaders in the U.S. and Europe know that they will never be able to pay off their debts, they’re getting ready to do everything in their power — behind the curtain — to get their hands on your wealth. They’re continuing to devalue currencies, which is nothing more than a transfer of wealth from your pocket to theirs as the purchasing power of your money declines. Hence, it’s the reason why crypto-currencies such as “Bitcoin” are now sprouting up like weeds, with some 32 alternative digital currencies now in circulation. They’re spying on you like never before, hunting down as much of your income and wealth to tax as they can. In France, they have all but outlawed gold ownership. India has slapped a 10-percent surcharge on buying gold. Germany is hunting down and taxing money that’s fled to Switzerland. The USA is making it nearly impossible for you to invest or put money offshore. - The gold market is minuscule compared to all the bad debt out there:
In fact, all the gold that’s ever been mined could fit in roughly two Olympic-size swimming pools. The markets for silver, platinum and palladium are even smaller, which means that it takes a relatively small trade to move them. In 2013, we saw how a relatively small amount of short selling was able to bring these markets down. If investors’ confidence in the ability of governments fade or disappears, the tiny precious-metal markets will become a powder keg ready to explode higher. Even the smallest amounts of new investment can send the gold, silver and other precious metal prices sharply higher. Moreover, the huge run-up in the price of gold over the past 12 years has done little to increase supplies. In 2001, total world gold production was 2,600 tonnes, and an ounce of gold averaged U$ 271 an ounce. In 2012, the latest full-year figures, total world production was only 3.8 percent higher, at 2,700 tonnes, despite a 615 percent increase in the price of gold.On top of this gold is more oversold than any other time since 1976. - Similarities of 1976 and 2013:
- Decline in Gold Stocks:
From 1974 to 1976 the Barron’s Gold Mining Index declined 67%. From 2011 to 2013, the HUI Gold Bugs Index declined 66%. - Gold Stocks vs. S&P 500:
While gold stocks experienced a 67% decline from 1974 to 1976, the stock market recovered strongly from the 1973-1974 recession. The chart below (re-balanced) shows the Barron’s Gold Mining Index against the S&P 500. The ratio declined 76% from 1974 to 1976.
Just like the 1974 to 1976 period, the gold stocks from 2011-2013, when measured against the S&P 500, have declined 77% as can be seen from below chart.
- Decline in Gold Price:
From 1974 to 1976 Gold declined 47%. From its 2011 top to 2013 bottom, Gold declined 37%. Why was the decline in the 1970s more severe? Gold had been free trading for less than five years. In that period the price exploded about 457%, whereas in the present bull market Gold had risen 650% in 11 years. In the three years prior to 1974 top Gold gained 333%, which dwarfs the 130% gain in the three years before the 2011 top. These figures explain why Gold in the present bull market hasn’t had a deeper downturn.- It is worth-mentioning that after the correction of
1974-1976, the gold-price rose from USD 134.50 an ounce, on December 31, 1976, to USD 850.16 an ounce on January 21st 1980, an increase of 532 percent in the following three years.
- It is worth-mentioning that after the correction of
- Long-term cycles are still on track:
Below monthly cycle chart for gold, based on data back to 1792, confirms, that we are now in the time frame for a major low and given the normal margin of error, the window spans from August 2013 to January 2014. Then the cycles point substantially higher heading all the way into June/July of 2015, followed by a small correction, and then another blast off into 2017.
- Decline in Gold Stocks:
FOOD:
Shortfalls and volatility in global food supplies and prices are likely to intensify in 2014, due to higher costs of production, greater demand for food and energy, and climate change. The coming global food crisis and subsequent price inflation has the potential of triggering riots and wars which will have an upwards pressure on the price of gold as a safe-haven.
Below video shows the 20 signs that a horrific Global food crisis is coming.
PGM CAPITAL COMMENTS:
As can be seen from below chart Palladium hasn’t participated in the 2013 correction and that palladium prices are year to date flat to slightly positive.
Besides as an asset protection vehicle, and in jewelries, palladium is being used today in a lot of technical application such as in; automobile catalytic converters, fuel-cells, dentistry, water treatment etc. Due to this, we are very bullish on the price for palladium 2014.
It is also worth mentioning that Freeport Mc-Moran Copper and Gold (Nyse: FCX) is the only listed gold producer that has seen an increase of its stock price in 2013. Below chart shows that the stock price of “Freeport Mc-Moran Copper and Gold”, has appreciated with approx. 9.75 percent this year.
With a solid balance-sheet, free cashflow, a Price to earnings ratio of approx. 13, we are very bullish on the stock for the coming years.
The Greatest Government Blunders of All Time:
Governments of major nations have trashed normalcy. They have made fatal, history-changing blunders — not just the greatest deficit spending of all time, not just the most massive money printing since Weimar Germany, but also many more.
Those government and their people, will ultimately pay dearly for those blunders. Their judgment day will come. And when it does come, the consequences for investors will be dramatically.
Big Losses for Bond Investors
The first to feel those consequences will be holders of long-term bonds. Bond prices are already falling as long-term interest rates rise, and the Fed’s just-announced action to taper its bond-buying program will only accelerate that trend.
But as investors exit the bond markets, they will shift their money to other assets, including stocks and gold.
The fact that on Friday, December 27th, the yield of the 10-year note closed above the psychological important level of 3 percent for the first time since july 3rd 2011, can be seen as a warning sign, that USA-Treasuries might be the cyanide pill for investors in 2014.
Six Megatrends for 2014:
Based on the above, we now predict the following major, megatrends for 2014 :
- Interest rates are going up for the long term and subsequently bond-prices will enter a declining long-term cycle.
- Gold and Silver, will be going up, also for the long term, for which Silver will be Gold on steroids.
- Stocks will be going up — at least in the short term.
- The Chinese yuan is expected to continue modest appreciation in 2014, underpinned by a large trade surplus.
- Central banks all over the world, will continue to do whatever it takes to get the economy of their respective county back on track.
- Food prices – like gold – will be going up for the long term, and stocks of food producers will profit from this trend.
Gold:
The gold bullion price chart below shows the long-term trend in gold bullion is still intact. Since 2001, the precious metal’s price has marched higher. As this chart shows, there have been many pullbacks along the way, but in all cases, gold bullion prices recovered and moved higher after their pullback. And we believe we will see gold prices recover again from their current price correction and move higher in 2014 and that the next high will be higher than the one of September 2011.
Regarding food, we believe that every portfolio from 2014 on, must have between 5 – 10 percent of the money invested the food value chain. Due to this our research team have compiled a list of stocks of food producers and ETFs which invest in the complete food value chain.
Before following any investment advice, please consider your investment horizon, financial position and risk tolerances and keep the following in mind:
- Human behaviour in the short term may be unpredictable and that emotions, such as culture politics, greed and fear may overrule logical thinking and subsequent decisions.
- Commodity and Precious metal prices as well as stocks of their miners may be very volatile and that sharp corrections may happen in the short term.
Wishing you a very healthy and profitable year in 2014.
Eric Panneflek