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July 2013 Quarterly Market Commentary 4800 I-55 North, Suite 21 Jackson, MS 39211 Post Office Box 14888 Jackson, MS 39236-4888 Phone: 601-368-3500 www.sbcorp.com M.L. Ballew, III T. Doug Dale, Jr. [email protected] [email protected] The Golden Calf and Rising Rates Most days, part of my morning ritual includes reading the “Children’s Story Bible” to my three children during breakfast. Recently, as we were reading through the books of Exodus and Numbers, it occurred to me how quickly people (including me) can get discouraged and lose faith when trials enter our lives. The Israelites When it comes to investing, we certainly got are all susceptible to losing discouraged faith, particularly when our and did so investment holdings are putting more than us through trials. once even as Moses, through God’s providence, led them out of slavery and into the promised land. When it comes to investing, we are all susceptible to losing faith, particularly when our investment holdings are putting us through “trials.” Without question, recessionary years like 2002 and 2008 will certainly do it. This is why we always keep an eye out for the next recession and accompanying bear market in equities. After all, if you are like us, you value a good night’s sleep as much as you value avoiding large losses. In this quarter’s market commentary, we will offer some history on both the presently out of favor gold and metals mining companies as well as share our views on the recent rise in longer term interest rates, which has impacted the bond market recently. The Golden Calf After two decades during the 80s and 90s of being an investment loser, gold and the companies in the precious metals mining businesses finally started to Security Ballew • Quarterly Market Commentary • July 2013 regain their luster in late 2000. The then technology heavy US equity market was on the cusp of transforming the mind set of investors from a “retire at 50” bull market to a “never retire” bear market. For the next eleven years, gold rose nearly 7.5 times from a low of around $250/oz to a September 2011 high of just over $1,900/oz. Companies like Newmont Mining and the Gold Miners The latest unemployment rates, disposable income, and budget as a percentage of GDP levels all point to an improving economy. Index likewise rose some 5.5 times from low to high. Due to spectacular performance and fundamentals, gold and the metals mining sector were again believed to be a sound hedge against inflation, currency and interest rate manipulation, These improvements coupled with and political and low inflation levels will lead to long-term increases in interest rates, which are BEARISH for gold. systemic risk in Precious metal investors should rightly ask the question, “Has the financial system right up the gold bubble popped or is until September this just a deep cyclical 2011 when gold correction within an ongoing reached just over secular bull market?” REAL RATES are currently negative, which spurs investors to place their cash into non-depreciating assets. Historically, gold is a good investment when this occurs. $1,900 an ounce. Since September of 2011, both gold and the mining sector have been “volatile” as our Since 2008, the MO money supply has experienced a four-fold increase. industry likes to put it (i.e. dropping like a brick). Therefore, precious metal investors Quantitiative Easing, should rightly ask the question, “Has the gold During bank lending has not increased proportionally, to bubble popped or is this just a deep cyclical the MO money supply. correction within an ongoing secular bull means the money in market?” History and the accompanying This circulation is far LESS than expected. charts will make solid arguments for both This DRASTIC INCREASE in the cases. Worth noting, commodity bull markets money supply is a potential catalyst for serious inflation. We may not see the have historically lasted anywhere from 13 to inflation directly in the CPI data, but it is showing in other signs of the economy. 23 years. Therefore, if the current commodity bull market involving gold is over this will have been a historically short lived one. Commodity bull markets tend to end with the Gold soared on predicted inflation expectations but these inflation levels never came to fruition. The actual inflation rate beginning of secular bull markets in stocks. stayed mostly below 4% Precious metals never got to the center of the investment universe from an over loved and low valuation and ending at an extremely high valuation over bullish perception standpoint. We suspect that the typically several decades later. secular bull market in stocks has not yet begun due to So, which will it be for gold? Time will tell, but the fact the valuations never reached levels associated even if September 2011 marks the top, a short term with all previous secular valuation lows. Worth noting, counter trend rally in the metals appears to be at hand secular bull markets in stocks tend to deliver 14-16% that could provide an investor willing to invest with annualized returns for long periods of time. The way a small portion of their capital above average gains in those future returns occur is by starting at an extremely the near term. Page 2 Security Ballew • Quarterly Market Commentary • July 2013 Rising Interest Rates May and June 2013 have witnessed a rapid rise in the entire yield curve that has caused the highest interest rate volatility on record dating back to 1960. The increase in rates and fall in bond prices came directly after Fed Chairman Ben Bernanke hinted that the Federal Reserve would begin tapering the central bank’s asset purchase There is no reason to fight the current price action; price action program if the economy continued to is the best short run indicator. improve. Like a sugar addicted child being In the short term it appears gold is told, “Sorry, no more candy for you for your bottoming as it enters seasonal strength. good behavior,” the markets went into convulsions. Interest rates are now above current inflation levels, which in turn provides investors a real (after inflation) Sell side volume in ETFs is at record highs, including return for holding intermediate and longer gold breaking the 200-day moving average on the weekly chart at $1450. date US treasury securities. Therefore, if you hold bond funds, this is unlikely to be a good time to sell them because of their recent decline in price. Historical COT reports indicate commercials are the most net long in gold futures Our near term expectation is for rates to that they have been in 8 years. Gold has had SIGNIFICANT sustained moves to the upside using this indicator. Additionally, the price of gold is close to the average all-in cash cost of gold–this represents a producer price floor. decline slightly followed by a continued interest rate rise by year end if the economy continues to imOur near term expectation is prove. Assuming for rates to decline somewhat rates approach in coming months followed by 3% on 10 year a continuation of the interest treasuries, we rate rise by year end if the believe that the economy continues to improve. stock market will have limited upside as we go into 2014. But, that is a story for a future commentary. In the interim, we would suggest staying diversified while maintaining a lower than your tolerance level of risk for the next few months. While gold is a finite resource, it is a commodity and NOT A CURRENCY. You cannot pay taxes or buy groceries with it. Gold is only worth what another We hope that you had a great July 4th person is willing to pay for it. celebration. As always, we welcome your questions and comments and are thankful for the trust you place in our investment advisory services. Gold is a finite resource and is a story of value, Countries will not be able to finance their debt at higher interest rates, which suggests a Sincerely, Gold pays no dividends and appreciates on FEAR and INFLATION T. Doug Dale, Jr. levels. In a competitive market, price equals marginal cost. In relation to gold, this is equal to the all-in cost of production. If real rates are BELOW 2% there is no reason to keep cash; the money will flow into assets that hold value such as gold. Page 3 Security Ballew • Quarterly Market Commentary • July 2013 Bottom Line • If the current commodity bull market involving gold is over this will have been a historically short lived one. Commodity bull markets tend to end with the beginning of secular bull markets in stocks. • We suspect that the secular bull market in stocks has not yet begun due to the fact the valuations never reached levels associated with all previous secular valuation lows. • Even if September 2011 marks the top, a short term counter trend rally in the metals appears to be at hand that could provide an investor willing to speculate with a small portion of their capital above average gains in the near term. • If you hold bond funds, this is unlikely to be a good time to sell them because of their recent decline in price. • We would suggest staying diversified while maintaining a lower than your tolerance level of risk for the next few months. Security Ballew Advisors in the News The media often turns to Security Ballew’s professionals for their expertise on financial matters and current market developments. For your convenience, below are links to some of our most recent media features: June 2013 Outlet: CNN Date: June 7, 2013 Is gold losing its luster? Expert: T. Doug Dale May 2013 Outlet: CNBC Date: May 15, 2013 Tomorrow in :30 Expert: T. Doug Dale Outlet: Medill News Services Date: May 15, 2013 Wholesale prices post largest drop in 3 years Expert: T. Doug Dale April 2013 Outlet: Fox Business Date: April 15, 2013 It's Time to Talk to Your Kids About Your Finances Expert: Karl Byrd The Quarterly Market Commentary is a quarterly publication for the benefit of the clients of Ballew/Russell, Inc. Pursuant to the provisions of Rule 206(4)-1 of the Investment Advisors Act of 1940, we advise all readers to recognize that they should not assume that recommendations made in the future will be profitable or will equal the performance of past recommendations. The contents of this letter have been compiled from original and published sources believed to be reliable but are not guaranteed as to accuracy or completeness. M. L. Ballew, III and T. Doug Dale, Jr. serve as portfolio managers at Ballew/Russell, Inc., a registered investment advisor, Ballew/Russell, Inc. is affiliated with Ballew Investments, Inc., a fully-disclosed introducing broker/dealer and FINRA/SIPC Member utilizing the clearing services of Pershing, LLC. Ballew/Russell, Inc. and Ballew Investments, Inc. are both subsidiaries of Security Ballew, Inc. Clients of Ballew/Russell, Inc. may have positions in and may from time to time make purchases and sales of securities mentioned herein. Page 4 SB Advisors M. L. Ballew, III, CPA, JD, LLM, Chairman of the Board C. Brooks Mosley, CPA, President Karl E. Byrd, CFP, Shareholder T. Doug Dale, Jr, CRPS, MBA, Shareholder James A. Hurt, CLU, ChFC, CSA, Shareholder Alan McCormick, MBA, Client Advisor Robert Scott Rives, Client Advisor Security Ballew Wealth Management is a comprehensive wealth management firm serving high net worth individuals, foundations, corporations and institutional pension funds. Among the firm's subsidiaries, IPS, serves as a TPA consultant to hundreds of corporate sponsored qualified 401(k) retirement programs.