A Closer Look at Stocks, Commodities and the US Dollar

Up…up…and away!

Stocks…commodities…the US dollar…there’s more unbridled enthusiasm being lavished upon these three investment vehicles than would be on an impromptu Victoria Secret fashion show in San Quentin.

Anything demanding that much attention must surely be worth a closer look. So grab your bifocals, Fellow Reckoners, and let’s investigate…

Victoria's Secret Models

Wait…wait! We meant the investment assets. Forgive us for spoiling your Friday afternoon. Let’s try that again…

Stocks. In the US, the S&P 500 polished off its best February in 14 years yesterday, ending the session up just over half a percent to close at 1,374. The broad market measure has been on a scintillating streak of late, adding nearly 10% year-to-date.

Are you excited yet?

And this just after the Dow eclipsed the psychological 13,000 mark earlier in the week. (The thirty bluest chips have since retreated a smidge, but still stand proud — incredibly, we reckon — at 12,980 points.)

And lo! It’s not just companies that make stuff and do stuff that are rallying. Stuff itself is on a tear too!

The Thomson Reuters/Jefferies CRB Commodity Index has added 5.5% so far for the year. The energy complex seems to be leading the way with tightly constrained oil markets at the forefront of traders’ minds. In fact, crude topped $110 per barrel just yesterday afternoon on mere whispers of further unrest in the Middle East…though this time not from the sandy patch you think.

Bloomberg was on the case:

Oil climbed over $110 a barrel for the first time since May after an Iranian state-run news channel reported an explosion on a pipeline in Saudi Arabia. A Saudi official said no oil facilities were sabotaged.

Futures reached $110.55 at 3:17 p.m. in New York after Iran’s Press TV reported on its English-language website that “an explosion has hit oil pipelines in the flashpoint Saudi Arabian city of Awwamiya,” then fell back below $109. Major General Mansour Al-Turki, a spokesman for the Saudi Interior Ministry, said no oil facility in the region has been sabotaged after reports of a fire near the Ras Tanura refinery.

In other words, markets are on high alert for rumor, hearsay and scuttlebutt. Commented Phil Streible, a Chicago-based commodities broker at RJO Futures, in the same Bloomberg article, “It looks like it’s a rumor but it shows you how sensitive the oil market is to any kind of supply constraint.”

We’ll have to reckon on that a bit more another day. Suffice to say, if a rumor can pop oil up a couple of bucks a barrel within a few minutes, imagine what an(other) all-out war in the region could do.

The dollar, too, has been strengthening steadily in recent months. Commented Addison in yesterday’s Daily Reckoning essay “Buying Loonies Isn’t Crazy”:

Throughout the eurozone crisis of the last few months, the US dollar has been attracting widespread “flight to safety” demand. But the dollar is not merely rallying against the euro; it is rallying against almost every investable asset on the planet. For example, a dollar buys 36% more silver today than it did six months ago. A dollar also buys 20% more wheat, 13% more corn… and even 2% more “American house.”

If we broaden out our analysis to include stocks and currencies, the results are similar. A dollar buys 32% more French stocks today than it did six months ago… as well as 34% more Indian stocks and 18% more Japanese stocks. Among world currencies, a dollar buys 11% more Norwegian kroner today than six months ago… as well as 15% more Swiss francs and 8% more Canadian dollars.

Gold, too, is well off its $1,550 per ounce starting point for the year. Alas, all the excitement proved more premature celebration than sustained performance this week when the Midas Metal got smacked down a whopping $90 in a single session. Last we checked, the ego bruised anti-dollar was sulking around the $1,720 mark. But is there more to the story?

The ever vigilant Dave Gonigam rounded up a few expert opinions in yesterday’s issue of The 5-Minute Forecast. We quote at length:

“You pretty much have to be brain dead not to see that this engineered price decline was precious metals specific…and deliberate,” says Ed Steer over at Casey Research.

“The ‘tell’,” adds the trading veteran who blogs as “Jesse” at Jesse’s Café Americain, “is the lack of a serious sell off in equities. The yawning divergence in the risk trade is hard to miss.”

“I have seen reports,” he adds, “that 225 million ounces of paper silver were dumped on the Comex in less than thirty minutes. The last time I checked there were less than 35 million ounces of silver registered with the dealers for delivery in at the Comex.”

“Unless you are a full time experienced trader playing with ‘cool money,’ stop trading,” he counsels. “This market is far too thin and given over to gimmicks for the average person to participate.”

But if you’re a long-term holder? They’ve just handed you another buying opportunity.

“A look at investment flows proves that [gold] isn’t anywhere close to being overbought,” reads a year-old analysis from Canadian resource investing legend Eric Sprott and Andrew Morris that’s still fresh as a newly-minted Gold Eagle.

They cite figures from CPM Group: Back in 1968, when gold first started to break from its moorings of $35 an ounce, gold held by individuals for investment purposes made up 5% of global financial assets.

“By 1980,” they write, “that amount had fallen to roughly 3%. By 1990 it had dropped significantly to 0.6%, and by the year 2000 represented a mere 0.2% of global assets.”

During gold’s run-up in the previous decade, that number has recovered to a mere 0.7%. “So despite gold reaching record nominal highs,” write Sprott and Morris, “the world holds about the same portion of its wealth in gold as it did over two decades ago.”

“Consider that to return to a meaningful level of gold investment, say to the 5% level of 1968, it would require over $9 trillion of gold investment today, or about 6.5 billion ounces of gold at the current gold price. This would represent well over 1.3 times the amount of gold ever produced throughout history and four times the amount of known gold reserves.”

“So not only is the public relatively underinvested in gold, but at current prices it isn’t even possible to increase our gold holdings back to a meaningful level.”

Thanks, Dave.


Joel Bowman
for The Daily Reckoning

The Daily Reckoning