First off, everyone should read John Mauldin's newsletter this week.
http://www.investorsinsight.com/thoughts_va.aspx?EditionID=634Steve Saville of "The Speculative Investor" had a great prediction issue this week.
http://www.speculative-investor.com/new/index.htmlI think he was right on.
Let me share just a few of his insights.
[Emphasis mine.]
Random speculations about the year ahead
*The US stock market's upside will be limited by falling corporate profits (and profit margins), continued pressure on the financial sector, political uncertainty, inflation fears, and a lack of growth in consumer spending.
*The stock market's downside will be mitigated by the beating already dished out to housing-related and financial stocks, as well as by the fact that the investing public is already very pessimistic.
*The upward trend in the US yield-spread that began in 2007 will persist through 2008, due initially to long-term interest rates falling less than short-term rates and then, later in the year, to long-term interest rates rising faster than short-term interest rates. This will create a generally positive environment for gold, although gold's bull market will be interrupted by a substantial 2-4 month correction that begins during the first two months of the year.
*Gold's H1-2008 correction will be driven by a strong US$ rally as currency speculators belatedly come to the realisation that the dollar's large purchasing-power discount to the euro is unwarranted.
*In a desperate effort to revive the economy and the electoral chances of the Republican Party, the US Federal Government will become the primary engine of debt/money expansion (inflation) during 2008. As a result, the people who doubt the ability of the powers-that-be to maintain a high level of monetary expansion in the face of a 'tapped out' consumer will receive an "Inflation 101" course. They will learn that there is no limit to the amount of bonds that the US government can issue to the Fed in exchange for newly-created currency.
Note: The "pushing on a string" analogy often cited in discussions about the inflationary abilities of governments and central banks is based on the patently false assumption that every increase in money supply will be met by an equivalent increase in money demand with no change in the price (purchasing power) of money. This assumption goes against basic economic law. Until the law of supply and demand is repealed there will be no question that an entity with the power to expand the supply of money ad infinitum will also have the power to reduce the purchasing power of the money (bring about a general increase in prices, that is). The challenge facing the monetary authorities isn't to maintain a high level of inflation; it's to do so whilst keeping inflation FEARS in check.
*Weakness in the economy will result in a deflation scare during the first half of 2008 (a "deflation scare" involves widespread fear that deflation is a threat, as opposed to something resembling actual deflation), but the nature of the current monetary system and political environment will ensure that the weaker the economy the greater the INFLATION.
And let me include some of his thoughts on gold.
If the dollar's current bottoming process follows the typical historical pattern then it will take 3-4 months to complete, after which a strong multi-month rebound should begin. This suggests to us that intermediate-term US$ rally will start before the end of March and that gold will reach an intermediate-term peak during the first two months of the year (since turning points in the gold market usually lead turning points in the currency market).
We expect that yield and credit spreads will continue to widen during 2008; that real interest rates will remain low; and that financial market volatility will increase. If so then the backdrop will remain 'gold bullish' and a US$-inspired 2-4 month downturn in the gold market during the first half of the year will be followed by another powerful advance. Our guess is that gold will end 2008 above $1000, but will trade below $750 at some point during the first half of the year.
Further to the above discussion, we suspect that gold is within about 6 weeks of an important peak. In the mean time, however, significant additional gains are likely.
With one exception (Gold Fields Ltd), we perceive considerably more downside risk in the major gold stocks than in gold bullion and only slightly more upside potential. As a result, we don't see a good reason to take long-term investment positions in the major gold stocks. This has, in fact, been our view for at least four years. The major gold stocks periodically become oversold relative to gold bullion and at such times they make good trading vehicles, but on a longer-term basis they are not worth the hassle. There are simply too many things that can go wrong with them compared to the amount of additional upside potential they offer. In our opinion, if you are risk-tolerant and looking for ways to leverage gains in the price of gold bullion then you should own a portfolio comprising mid-tier and junior gold mining equities, but if you are risk averse you should focus on gold bullion or gold bullion surrogates such as GLD.
The gold-stock indices can be expected to track gold bullion during 2008, falling further during gold-market corrections and rebounding faster thereafter. However, if the broad stock market were to become very weak then we could encounter a period during which the gold sector falls while gold bullion rises.
We expect to see an increase in takeover activity in the gold sector during 2008, with mid-tier miners seeking to acquire juniors and majors seeking to acquire mid-tiers.
As has been the case for the past few years, our main focus for 2008 will almost certainly remain on the junior end of the gold mining sector. The juniors, especially the exploration-stage miners, were a source of considerable frustration during the second half of last year because they generally failed to respond in a meaningful way to the strong advance in the gold price. However, the nature of the junior end of the resource market is that all of the gains tend to occur in 10% of the time, with prices drifting lower or going nowhere over the remaining 90% of the time. Also, the prices of junior mining stocks are often poorly correlated in the short-term with the prices of the underlying commodities. As a result, to be a successful speculator in junior gold and other resource shares you need a lot of patience and foresight.
We imagine that people who only became involved with junior gold shares over the past year are feeling disgruntled because they haven't yet experienced, first hand, what happens to these stocks when the speculative juices begin to flow, whereas those who have been involved in the sector for at least 2-3 years will realise just how quickly prices rise once the rise begins.
To summarize, here's what I'm thinking now:
I think big energy stocks will do well this year.
They haven't run up with oil and won't come down hard if oil comes down.
They should go steadily up with some corrections along the way.
And they can earn good dividends.
I'm talking about IEZ and IEO like stocks.
(SLB, BHI, NOV, APA, APC, etc)
And energy trusts.
I think gold will do exceptionally well this year if you can time the tides.
I'm really going to try to that this year.
Probably best to play the juniors for the trades and hold the large gold stocks as a core throughout.
So, after a gold run up in February, I'll move some of that money into big energy.
I think uranium will be consolidating until November.
Might be worth lightening up on uranium during any early year rally (say into March).
And I'm sure agriculture will do well to (DBA, MOO, etc).
Big, international, value, dividend, non-financial type stocks should do the best in 2008.
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