Weekly Update by Puru Saxena

Global stock markets continue to grind upwards amidst overbought technical and euphoric sentiment. It is interesting to observe that Weimer hyperinflation has replaced the global depression hype and everyone seems to be preparing for runaway inflation. Whilst is it true that our world has never seen such a massive stimulus package, it is worth noting that central-bank sponsored inflation is currently locking horns with private-sector credit contraction.

Our view remains that global stock markets are over-extended and a multi-week correction/consolidation is in order. Whether the trend reversal occurs now or in a week, this is not the time to allocate fresh capital to over-brought assets. If our assessment is correct, a better buying opportunity will probably present itself later this year. Remember, some emerging markets have almost doubled off the crash lows and such moves are unsustainable beyond the short-term. Our preferred markets (China, India and Vietnam) have been amongst the best performers and we’ve recently sold half of our positions in China and India. After the correction is over, we’ll re-invest the capital.

Over in the energy markets, crude oil continues to rally and some froth is beginning to emerge. Only a few months ago, everyone was calling for twenty dollar oil and now, analysts are talking about much higher prices. Our expectation is that crude oil will correct somewhat over the following weeks. So, hang on to your positions but wait before adding new capital. Natural gas seems to have bottomed out and we recommend that investors play the upside on the physical product. After the horrific crash last year, the price of natural gas should rise over the following months and this action is likely to benefit gas producers. So, hold on to your positions in gas companies.

In the world of currencies, the US Dollar remains weak and it is struggling to carve out a bottom. Sentiment is horrendous towards the greenback and the entire world is predicting a dollar crash. Look; we are no fans of the US Dollar but other currencies aren’t much better. And whenever you see universal agreement in the markets, it usually pays to go the other way. Our belief is that the US Dollar is poised for a bounce and major world currencies such as the Euro, British Pound, Aussie and Canadian Dollars are due for a pull-back. The next wave of credit-contraction will probably send the American currency higher.

Real money (gold and silver) continues to consolidate after the recent gains and we expect a further correction over the following weeks. It seems to us that gold’s pullback will end above $900 per ounce, so investors can start buying on any near-term weakness. Silver will probably correct more than gold, so wait before adding to your positions. After the summer correction is complete, we anticipate an explosive move in all precious metals. Remember, so far in this bull-market, precious metals have had huge rallies every two years. So, if this trend consistency remains intact, we’re likely to see much higher prices by next spring. Precious metals mining shares are currently over-bought and investors should wait for a correction before adding to their positions. If our thesis about an explosive move in precious metals is correct, the mining shares will record huge gains over the next year. We’re patiently waiting in cash before we allocate 10% of our clients’ capital to the precious metals mining equities.

Finally, in the bond market, long dated US Treasuries are extremely over-sold and any correction in stocks and commodities will probably be the catalyst for a rally in US government bonds. After touching almost 4% on Wednesday, the yield on the 10-year Treasury Note dropped somewhat on Thursday and this could be the start of a trend reversal. The 30-year Treasury Bond is also very oversold and it may rally over the summer months. Although bonds represent lousy long-term value (you can thank the money-printing central banks), nimble traders may want to play the upside over the following weeks.