The combination of a stronger U.S. dollar, weak economic numbers, and negative comments from Fed officials yesterday, led to the worst one-day decline in the Dow Jones Industrial Average (DJI) since Feb. 23. And selling became more intense when it became clear that stocks would again turn away from the psychologically important Dow 11,000 level.
Weak economic activity in the euro zone in Q4 led to a flight to the dollar and gold yesterday. And continued concern over Greece’s ability to finance its debt added to the rush to buy dollars. Greece said its 2009 deficit would be slightly higher than forecast, and sellers drove the country’s 10-year bonds to their highest levels in more than 10 years.
Fed Chairman Bernanke warned that, “the U.S. must start to prepare for challenges posed by an aging population with a credible plan to gradually reduce a soaring public debt” (Wall Street Journal). Bernanke was quoted as saying that, “the U.S. will ultimately have to decide between raising taxes, cutting Social Security or Medicare, or less spending on everything from education to defense.”
The market pullback picked up momentum following these comments and data from the Fed showing that consumer borrowing fell $11.5 billion in February, which was much less than expected. More than two-thirds of the economy is dependent upon consumer spending, so improvements must come from that sector if the economy is to revive.
Monsanto (MON) fell 2.1% following a 19% drop in fiscal Q2 earnings. But gold stocks were strong with Barrick Gold Corp. (ABX), Goldcorp (GG) and IAMGOLD Corp. (IAG) all posting sharp gains.
At the close, the Dow was down 72 points to 10,898, the S&P 500 (SPX) lost 7 points to 1,182, and the Nasdaq (NASD) fell 6 points to 2,431.
Downside volume on both major exchanges picked up moderately with the NYSE trading 1.2 billion shares and the Nasdaq trading 693 million shares. Decliners were ahead of advancers by about 9-to-5 on the NYSE and 7-to-6 on the Nasdaq.
May crude oil fell 96 cents to $85.88 a barrel, and the Energy Select Sector SPDR (XLE) lost 59 cents, closing at $58.99.
Gold for June delivery gained $17 to settle at $1,153 an ounce, and the PHLX Gold/Silver Sector Index (XAU) gained 3.47 points to 176.05.
What the Markets Are Saying
Yesterday’s selling was a reaction to unfavorable economic news in a stock market that is very overbought. Technically, it was not a major reversal, but if downside volume picks up and the indices close below the 20-day moving averages of the major indices, stocks will probably be in for a serious correction.
Here are the levels of the 20-day moving averages:
Dow — 10,800.86
S&P 500 — 1,167.05
Nasdaq — 2395.25.
Now I’d like to pick up where we left off yesterday in our discussion of gold.
For thousands of years, gold and other precious metals have been the “safe haven” in time of economic, political and social unrest. In times of war and international instability, and when currencies lose value or inflation robs investors of their buying power, gold has always held its own and most often even appreciated.
There are four ways to buy gold:
1. Bullion (bars)
2. Coins
3. Mining companies’ stocks
4. Mutual funds or exchange-traded funds (ETF)
Bullion participates directly in the price of gold, but can be illiquid and expensive to own. Storage, carrying charges, and commission rule out bullion for all but the wealthiest investors.
Coins are a choice if the investor wants to physically hold his gold and admire the beauty of it. But owning coins can be expensive with big spreads between buy and sell prices.
Both bullion and coins are priced to only appreciate if gold appreciates. If gold were to remain stagnant for long periods of time, holding charges will cost the buyers of bullion and coins.
In my opinion, common stocks of the world’s largest mining companies are a good choice for owning an asset that appreciates with the price of gold. The stocks are not only liquid (they trade like any other stock), but the owner participates in the profits of the company, and the best companies also pay dividends, which when compounded over the lifetime of the investment, provide a superior return to owning either the metal or coins.
The stocks of gold mining companies will often appreciate faster than the price of gold itself due to the efficiencies of the mining operation. But the reverse can also be true, i.e., when gold declines, the mining stocks often fall faster than the price of bullion. In addition, there is the company risk that comes with owning any stock. In the case of mining companies it could be mining disasters, poor management, and other unforeseen conditions that could inject volatility into the price structure of the investment.
In the past decade, another form of stock ownership of gold has taken the lion’s share of investors’ attention, and for good reason. Gold and precious metals funds, both mutual funds and ETFs, provide a direct participation in the operations of the world’s best managed mines. Thus, the risk of a disaster in one mine is mitigated by the diversity offered by the fund. And dividends are pooled and paid to investors or reinvested, providing for a type of dollar-cost-averaging. The cost of managing the funds is usually low, and the initial cost is no more than a standard stock commission.
According to Jim Cramer, “When people think about what percentage of their portfolio should be insurance, they should think maybe 20% and do it with a gold stock.
See our Trade of the Day for an ETF that has met the test of time.
Today’s Trading Landscape
Earnings to be reported before the opening include: International Speedway, Pier 1 Imports and RPM.
Economic reports due: chain store sales, jobless claims (the consensus expects 436,000), RBC CASH Index, EIA natural gas report, Fed balance sheet and money supply.
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