Friday, June 27, 2008

Gold finds its mojo

All day CNBC pundits have been screaming how this is the worst June since the Great Depression and how the DOW was already in bear market territory (intraday). If you recall, I have been leaning towards seeing the March lows hold for the rest of this year. Although I based that statement on the S&P which is still above the March low of 1257, all indications are that it will join the DOW and financials in dropping to a new low. Fortunately for me, it wasn't a conjecture that I base my investment decisions on. The emphasis in my portfolio has always been on precious metals, commodities, and the global growth story. That have worked well this year and is continuing to work in this difficult environment.

That said, I did some bottom picking this week, mostly the last hour on Thursday. I picked up some Citi during the last hour on Thursday. It slid further on Friday and was below $17 at one point but recovered to close at $17.25. I intended this to be a short term trade -- I'm betting on that some of the selling was due to quarter end window dressing and it will recover some ground next week.

I also picked up some COW (live stock ETN) on Thursday which was intended as a longer term position. Besides trying to complement my holdings in DBA, the move was also prompted by this piece from John Mauldin. Here's the relevant quote:

Because we have devoted so much of our arable land to corn (in a very misguided policy to turn food into ethanol), we have less for soybeans, which is putting upward price pressure on beans and other grains that are used to feed cattle, hogs, chickens, etc. In fact, it costs so much to feed livestock that ranchers are shrinking their herds.. This means more meat is coming into the system now, which is dampening prices. Increased supply will reduce prices in the short term, but next fall we will find that supplies of all types of meat will be short. That will potentially send meat prices soaring. Cereal and bakery products are up 10% over the last year. They could continue to rise in the fall if the corn crop does not yield more than currently projected. It will cost even more to feed your household and feed the animals we need for meat.

Undoubtedly the star performer in my portfolio this week has been PM stocks which awoke from a consolidation triangle. Gold gained over $30 on Thursday, the most ever so I heard. I was prepared to see gold take another drubbing going into the Fed meeting on Tuesday. The market seemed to think so as well since gold sold off that morning but finished strong after a rather bland Fed statement. It was a situation where if I were given an advance copy of the statement I still wouldn't be able to predict the market reaction. Apparently, the Fed was too dovish and the dollar sold off. To be honest, I don't see any near term catalyst for gold's move, at least not one that a CNBC anchor would give. Of course, the market could be realizing that real rates are negative everywhere and that gold is real money -- wouldn't that be nice!

On the other hand, a break out from a long consolidation, with no apparent reason, is usually the most powerful kind. One could also argue there is something magical about a 3.5-months consolidation (mid March to end of June) following a 7-months advance (mid August to mid March), which is, you know, astrology at its finest. The fact is, after a punishing month of June, the $vix is still only in the mid 20's. The workhorses that have been pulling this market along: fertilizer, coal, oil and nat gas all look toppy. Might gold be regaining some of its shine as a safe haven asset against a potential market crash? Who knows, but I'm holding onto my 35% allocation in PMs and PM miners in my actively managed accounts!