Thursday, August 19, 2010

Brief Markets Update

Toward the end of his letter today, in which he makes an impassioned case for lower Treasury rates over time, David Rosenberg mentions that he has heard that bulls on Treasuries are now at the 98% level; there were said to be 99% bulls in December 2008, at the peak of that buying panic/short-covering rally in Treasuries. Of course, that was followed by a massive bear market in Treasuries, with yields nearly doubling on the 10-year and rising over 200 basis points on the 30-year.

It took over a month after the Lehman/AIG mess for yields on the 30-year bond to get unstuck from the 4-4.5% trading range. By then, it was obvious that a global credit collapse and severe economic downturn in the U. S. were underway. Now, while there is lots of anxiety, and a new recession or significant intensification of an ongoing depression are certainly possible, but it is also possible that economic activity will strengthen or at least that leading indicators will turn up.

Certainly the price of silver and platinum are treading water rather than collapsing, and gold is becalmed on a multi-month basis; and there is no general price deflation that anyone can see.

So, both on fundamental (inflation and governmental supply-demand), technical and sentiment bases, Treasuries look risky to me here on a trading basis. And, pricing of munis has followed that of Treasuries upward. I suspect that people and institutions have been capitulating from cash and ever-disappointing equities into bonds, and that this has almost all the characteristics of an intermediate top in the bond bull market. Is it the final hurrah? Time will tell; I suspect not.

More and more the financial landscape is beginning to look as though Treasuries are turning into trading vehicles, with the Japan scenario held out to justify aggressive price targets for the bonds (i.e., yet lower yields). However, in U. S. history, if one thinks back to the 1930s and 1940s, when Treasuries got to very low yields, high quality dividend-paying stocks did better on a multi-year basis, and bonds generally provided zero or negative returns after inflation. People forget how fast consumer prices rose even in a number of years after 1933 in the rest of the Great Depression years and especially in the post-Depression 1940s, which was a high-inflation decade.

While both the charts and the short-term economic trends don't look too promising for stocks, I am getting interested in financially very strong U. S.-based companies with large to very large international sales, such as McDonald's (mentioned yesterday), ExxonMobil, Intel and others, on a total return basis for portfolios with a longer-term horizon.

I also continue to believe that gold's technicals and "fundamentals" make it a very sensible approach to wealth preservation, both through direct physical ownership and through share ownership in ETFs such as GTU and PHYS that own allocated bullion in vaults in Canada.

Family commitments will limit posting over the next several days.


  1. PHYS is a terrible investment vehicle. It's a closed-end fund so you have all the vagaries of discounts and premiums.

    There is also this little gotcha in the prospectus:

    "If any holder redeems his, her or its units for physical gold bullion (regardless of whether the holder requesting redemption is a U.S. Holder or an Electing Holder), the Trust will be treated as if it sold physical gold bullion for its fair market value in order to redeem the holder’s units. As a result, any Electing Holder will be required to currently include in income his, her or its pro rata share of the Trust’s gain from such deemed disposition (taxable to a Non-Corporate Electing Holder at a maximum rate of 28% under current law if the Trust has held the physical gold bullion for more than one year) even though the deemed disposition by the Trust is not attributable to any action on the Electing Holder’s part."

    So you can get hit with a pro-rated share of the tax bill on someone else's gains even if you haven't realized gains yourself.

    I would recommend the Swiss ZKB funds if you want allocated gold. I trust SGOL more than GTU but GTU is probably safe. also has allocated gold but I don't know what to make of it. I have never heard anything bad but the idea of an Internet-based gold vault gives me pause.

  2. Agree w the theoretical problem of tax if a major part of inventory is removed. Few are aware of that. I doubt it's a problem unless gold soars. Re the premium variability, I look at that as a potential opportunity. Let us say GLD is found, or strongly rumored, to be a bit short on actual gold holdings. PHYS may soar.

    I would also be curious as to why you trust SGOL. I thought I trusted it too, then reread the prospectus and sold it all.

    Thanks for the tip re ZKB fund. Will check it out . . .

  3. I understand the concern about GLD possibly not having all the bullion they claim, which is why I prefer ZKB and SGOL. What didn't you like about SGOL?

    When you look at ZKB there are 3 funds depending on which country you want to use for the vault. I also found a pink sheet stock ZKBGF that appears to be the same fund except trading in $/oz. I can't find much info on it though.

    Actually, I prefer holding physical metal, which I also have. No question as to whether it really exists and you can use it to bribe the freighter captain to get you out of the country.