Long Term: Stocks and Commodities Up, Dollar Down, Bonds Down

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Posted: Jul 28, 2011 12:01 AM

We are in the third year of Obama's administration, the year before elections, so the Obama administration does not want to make any unpopular moves, thus will do everything to prevent a financial crisis.

Meanwhile the Republicans do not want to get blamed for stonewalling on the debt ceiling issue, which would create a financial crisis of sorts. Thus, both sides will come to a resolution on the debt ceiling matter. The Republicans will get their limited tax hikes and the Democrats will get their limited U.S. spending cuts. Note, spending cuts and tax hikes are deflationary, which is not good for gold, but since the Republicans and Democrats will have to eventually have to land on common ground, this should be good for gold.

Thus, the debt ceiling will be raised and the market knows it so continues higher, albeit in a sloppy manner, as headline news telegraphs the on-again, off-again settlement on the debt ceiling matter.

Gold has many tailwinds:
=Fiat currency printing (quantitative easing) in the U.S. and in Europe. The PIIGS are bankrupt so expect more money printing out of the ECB (European Central Bank).
=Limited spending cuts and limited tax increases via the eventual agreement to hike the debt ceiling.
=A safe haven when investors get scared the debt ceiling will not get raised.
=Demand on gold from fast growing countries such as China.
=Stagflation in the U.S. is in the offing (high inflation, low growth). Remember how well precious metals did in the 1970s? Gold is not just a safe haven but also is a hedge against inflation. As more money gets printed, the higher gold will rise.

What about silver?
Silver directionally correlates highly with gold and outperforms gold by 2 to 4 times. Further fiat money printing in the US and in Europe will cause the dollar to fall further thus hard assets including gold and silver should continue their long term uptrends.

Our bets are on 2-times silver ETF AGQ, but more conservative investors can take positions in 1-times silver ETF SLV or 1-times gold ETF GLD. There is also 'middle' ground with 2-times gold ETF DGP.

When the debt ceiling agreement is reached, use any pullback in precious metals as a buying opportunity, as the long term trend is up.

When we went public calling for $50/oz silver back when silver was trading around $20/oz, our projection was met with shock and deep skepticism. Silver futures eventually touched $50/oz on April 28, 2011. It is one of the reasons we have once again well outperformed the general markets this year, a year that many have found most challenging as it is a trendless, go-nowhere year that has been stuck in a trading range as of this writing [July 26, 2011].

Of course, with the debt ceiling agreement around the corner, we would not be surprised to see the general markets break out of this trading range, so we continue to report on actionable stocks through our various services here on Virtue of Selfish Investing.

We will be releasing our latest price projections on precious metals shortly.


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