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Inflation, Oil, Gold, Ignorance, and The Media

Inflation, Oil, Gold, Ignorance, and The Media

We hear many so-called pundits say that rising oil prices will dramatically damage growth in the emerging world.  However, we see the contrary as more likely to occur: rising oil prices will unleash more inflation in the emerging world, which may actually accelerate economic activity.  We already are seeing substantial inflation in the emerging world.  It will be exacerbated by oil price increases.

Assuming that oil does not go crazy and rocket up past $150 per barrel in 2011, we maintain that higher oil prices don’t have to derail economic growth in the emerging world.  Many emerging countries export more oil than they import, and others often produce exportable commodities which tend to rise in price along with oil, such as foodstuffs, base metals and precious metals.


Some Countries’ Policies Put Them at More Risk than Others

Some countries have to import large amounts of oil.  A few of these countries also subsidize the price of oil and gasoline to their citizens at below-market rates.   Most nations are not so unwise as to both import and subsidize the price of oil to their citizens, but there are a few who do so.

These countries are the big losers from rapidly-rising oil prices: major oil-importing countries, like the U.S., and those subsidize consumers, such as Egypt, India, Pakistan, Sri Lanka, and Singapore.

Additionally, most emerging countries do not use as much oil for energy as compared to the western nations.  China, for example, uses oil to meet about 20% of its energy needs; instead leaning on coal, natural gas, nuclear, and alternative fuels for 80% of their energy.

We have stated in past weeks and we continue to reinforce our view that gold and oil are going much higher in price.  Oil could reach $150 per barrel in 2011, and we expect gold to move through $1,500 an ounce and exceed $1,600 an ounce in the not-too-distant future.

Guild Guide 
We Are Making Changes To Our Recommendations

It is Time to Take Profits on Grains and Related Agriculture Investments

In December 2008 we recommended that investors purchase the following grains: wheat, corn and soybeans.  Since that time, all three of these grains have had strong price increases.  We are now recommending taking profits in all three grains.  Since our recommendation in December of 2008, Wheat is up 35.0%, Corn is up 81.0%, and Soybeans are up 44.1%.  We intend to re-enter the agriculture and grain markets if prices fall in the coming months. 

We believe that the end of winter weather, optimism about the spring planting season in the northern hemisphere, and farmers’ incentive to plant more acreage (and use more fertilizers and other inputs) will lead to bigger crops in 2011 in much of the world.  This does little to solve the world’s long-term structural problems surrounding food supplies, but we believe it should cause grain prices to fall in coming months. 

Longer term, our view that the U.S. dollar will fall and that all commodities will rise in price makes grain attractive, but we expect a price correction in the meantime, so we are selling at this time.

What do Higher Oil Prices Mean for Our Recommended Countries? 

In light of our call for oil to move to $150/ barrel this year we must reassess the impact on the countries that we have recommended for investment. There are 5 countries recommended.

We believe investors should continue to hold Colombia, U.S., Canada, Australia, and Japan; but it is time to sell South Korea.

Colombia is a strong hold because a big part of the Colombian economy is oil and gas production.  The country has a pro-business focus and should be a beneficiary of higher commodity prices.

The U.S., Australia, and Canada still offer some upside potential.  These countries are more durable as they have many industries that are benefitted by higher commodity prices, such as timber, mining, oil and gas, agriculture, and especially in the case of the U.S. and Japan, a vibrant technology sector.

While Japan will be hurt by rising oil prices, we are not ready to sell Japan.  This is because the Japanese market has already been through a long-term bear market.  Their companies have strong technical underpinnings, they are expanding trade relationships with the developing world, and their stock market is selling at a low valuation.  For these reasons, we believe Japan still deserves a hold rating.  

South Korea produces many technology products and is prospering from them, however, South Korea also produces heavy machinery and industrial products.  These consume a great deal of energy and raw materials.  Higher energy costs and fears of slower economic growth in the developed world resulting from higher oil prices could hit South Korea harder than some other markets.  We are recommending selling South Korea.  Over the long-term, we are fans of the country, but we are concerned that high oil prices could derail their stock market for a few months, so for now we are removing it from our recommended list.

Summary

Comex Gold (03/03/10 – 03/03/11)
 

Nymex Crude Oil (03/03/10 – 03/03/11)

Gold and oil are going much higher next stop for Gold $1500 and the $1600 per ounce and higher.  In our opinion, oil will reach $150 per barrel in 2011.

Our Recommendations—In Review

Bonds

Intermediate and long-term bonds present a risk of falling, and we still recommend avoiding them entirely.

Gold

We have been bullish since June 25, 2002, when gold was selling at about $325 per ounce.  We see gold moving to $1,500 and then higher, so you should take opportunities the market gives you to sell spikes and buy dips.

Food and Farm-Related Stocks (Sold)

We have been bullish on grains and farm-related shares since late 2008.  Due to the spike in prices these past few months, we are no longer recommending that investors buy them at these levels.  We are recommending taking profits in the grains. 

We expect that as the northern hemisphere moves from the winter season to the spring season, headlines of discussing bad weather will dissipate, and markets will focus on a very active planting season.  We believe that some investors will conclude that 2011’s crops will be better than 2010’s.  Longerterm, this is a sector that will provide gains for investors, but these next few months may see them get a good pull back. 

We still believe the possibility of food crises in Africa, Asia and Latin America is very real, but we also believe that markets can get ahead of themselves.

Oil

Since February 11, 2009, when oil was trading at $35.94 per barrel, we have recommended that investors own oil investments in their portfolios.  Events in the Middle East reinforce this thesis each day.

Currencies

Since September 14, 2010, we have favored the Singaporean, Thai, Canadian, Swiss, Brazilian, Chinese, and Australian currencies.  Use pullbacks in these currencies as an opportunity to establish long-term positions.  For long-term investment, we do not like the U.S. dollar, Japanese yen, British pound, or the Euro. 

Global Stock Selections

For stock investments throughout the world we base our recommendations on careful studying of individual companies and industries, always keeping in mind that companies and sectors are at differing stages of growth.  In developed countries, technology, precious metals, and commodity producers will all benefit from an improving economy and a developing back-to-work trend in the U.S. and Europe.

Since September 9, 2010, we have thought U.S. stocks will go up as money flows into them and out of bonds.  We recommend investors use corrections, which can occur at any time, as buying opportunities.

We are also still maintaining our bullish position on Canada, and are keeping half of our original position in Colombia, but we are not comfortable recommending South Korea while oil prices have so much pressure to the upside.

We continue to monitor world events closely, and encourage readers keep an eye out for changes to our recommendations.  A summary of our current recommendations can be found in the table below:


Investment

Date Recommended

Appreciation/Depreciation in U.S. Dollars

Commodities



Gold

6/25/2002

335.8 % 

Corn (Sold)

12/31/2008

81.0 %

Soybeans (Sold)

12/31/2008

44.1 %

Wheat (Sold)

12/31/2008

35.0 %

Oil

2/11/2009

 183.6 %

   Currencies



Singapore Dollar

9/13/2010

 5.4%

Thai Baht

9/13/2010

 6.2%

Canadian Dollar

9/13/2010

 5.6%

Swiss Franc

9/13/2010

 8.1%

Brazilian Real

9/13/2010

 3.6%

Chinese Yuan

9/13/2010

 2.7%

Australian Dollar

9/13/2010

 8.2%

   Countries

 


U.S.

9/09/2010

 20.5%

Colombia (half of our original position)

9/13/2010

 3.3%

Canada

12/16/2010

 11.9%

South Korea (Sold)

01/06/2011

 -2.9%

Australia

02/15/2011

 0.1%

Japan (hedge yen exposure)

02/15/2011

 0.0%