Download The Golden Calf and Rising Rates

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.
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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.
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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.