The Daily Crux: Chris, in March of last year, you told your readers to load up on positions in stocks, precious metals, and cash. Those who did caught almost all of 2009's incredible rally, and ended up having an unbelievable year. Now we've heard you've become more cautious. Can you update us on your thoughts on the markets?

Chris Weber: Well, we did do several things right last year. As you mentioned, we had our positions one-third each in stocks, metals, and cash.

Of the 22 investments we held for most or all of last year, 21 of them were up and just one of them was down, and by only 3.5%. We had several stocks with triple-digit gains, and ended up with a 69% average gain, compared to the Dow being up about 19% and the S&P 500 up 24%.

So yes, we did very well last year.

That said, it's actually been almost too good. I believe most of the gains last year in all areas were the result of huge infusions of new money and credit surging into every asset except the real economy, and I said late last year that I didn't expect 2010 to be as great for us. In fact, I suspected it could be quite brutal.

The rally that started last March has always seemed to be a bear market rally to me, and they can stop as quickly as they start. This one may be over now.

As I look out at the global stock indices, I see only very toppy behavior.

I've been very concerned that the markets across the board would fall during 2010. January's action saw this happen – across the globe and across all asset classes.

China has fallen almost 10% since the end of 2009. Japan is down about 3%. India, Australia, the U.K., and Germany all fell about 6%. The U.S. actually did relatively better: It was down only about 3.5% or 4% for the Dow and S&P 500.

All of the major currencies fell against the U.S. dollar in January. The euro, Aussie dollar, Canadian dollar, and the Swiss franc were all down about 3%.

Gold fell too, down a little over 1% in U.S. dollar terms, but that means it actually rose in terms of all the other currencies I just mentioned. In fact, gold has outperformed all the major stock markets and currencies, except the U.S. dollar. So you've got a situation where practically everything has been falling against the dollar and gold.

It's a bit contrarian, but I still think that deflation remains a great danger, and I think what we've seen from the markets so far this year validates this point. And not just assets have fallen. Interest yields continue to fall or remain relatively low as well.

We may not be going into deflation, but pretty much every major market and indicator – at least so far this year – says we will. And I don't like to be on the opposite side of a major market trend.

I decided late last year that I would not expect to make huge profits this year, but instead would focus on keeping what I have – on not losing money. And I continue to approach the markets this way.

Crux: Assuming these trends continue, what do you like right now? Where do you suggest readers put their money?

Weber: Well, it may sound extreme, but I think that almost all new money should go into a combination of cash and precious metals held physically.

I'm of the view that you can't have too much cash right now.

My choice has been the U.S. dollar for 90% of my cash holdings. That's mostly because I'm living in the U.S. again, but I think we could still see more dollar strength versus all the other "cash" in the world.

The important idea is that most people should be concentrating on losing as little as possible, rather than gaining as much as possible, and right now that means holding a significant amount of cash.

As far as the metals go, I recommend physical gold, silver, and platinum, in that order.

We still own some stocks, but they are either precious metals stocks held at no risk – meaning we've already sold enough to protect our original investment – or stocks that we bought last year in March that we've been holding with relatively tight trailing stops.

Over the last few months, I haven't wanted to make any new recommendations, because I've been worried that we're going into a period where nearly everything will fall in value.

So at this time, I'm not interested in acquiring new positions in anything but more cash and more metals.

I know that probably sounds absurd to a lot of people, but I don't see any other great buys right now. I think it's important to be patient and not to trade just for the sake of trading.

Not only do you run the risk of losing money, but you miss out on a fantastic opportunity. It's typically during these times of inactivity that many of my best ideas have come to me.

Crux: That's great advice, Chris.

You mentioned you believe most assets will fall in value, but you're still recommending buying more physical gold and silver. Can you explain your reasoning here? Do you see gold or silver bucking this trend?

Weber: Well, first let me say that I still believe the precious metals are in a major bull market that started in 2001. That has not changed in my mind.

But we have seen a correction in precious metals so far this year – along with most asset classes – and it's possible there's still more downside. They had gone up so far, so fast in the past year that I was expecting to see a correction or a period of consolidation early this year.

How long this correction will last or how far it will go is anyone's guess. Gold and silver will fall to a sufficient extent that many people will panic and sell them, and some of the excitement we've seen build in the sector will fade.

I actually expected the correction in gold that started in March 2008 – the first time it rose over $1,000 – to be much worse than it turned out to be.

We only have the big bull market of the 1970s to compare to, but during one 18-month period in 1975 and 1976, gold lost 50%.

By comparison, the correction in March 2008 bottomed after just seven months, and fell only about 30%. After that, gold bounced strongly back to over $1,200 relatively quickly.

This means that so far in this bull market we haven't seen anything like the big correction of the '70s, a decade that saw gold rise overall from $35 to $850 – over 2,000%.

So this may be just another short rest like many others we've seen, or it might be longer and take gold back below $1,000.

Gold could easily go back below $1,000 and still be in a bull market. Unfortunately, we can't know for sure if it will get there, which is why I don't recommend waiting for this to happen before buying.

Trying to time purchases is very difficult. We may have already seen the lows.

My advice is to take advantage of the recent 10% discount from the peak and buy some, if you don't already have it.

Today, gold is trading above $1,100, so that means it's actually up against even the U.S. dollar since the start of the year. Since the U.S. dollar is up so much against the other major currencies, you can imagine how well gold is doing in those currencies as well.

Gold is up about 5% so far this year against the euro.

It just goes to show you that even during what most people are considering to be a gold correction, gold is actually doing pretty well.

So again, I don't recommend you try to time your buying.

Just start accumulating gold, and think about it in terms of how many ounces or grams – rather than how many dollars worth – you own.

Crux: Do you feel similarly about silver?

Weber: Well, silver is trickier than gold.

I first recommended physical silver about six years ago, in January 2004. We had owned silver stocks, but I was waiting for silver to fall a bit to get a better price – exactly what I just told you not to do.

Well, as I said it's very difficult to time your purchases, and we never got that better price. In early 2004, silver really began to take off, and I didn't want my readers to miss out on any more of the move, so I officially recommended it.

We got in around $6. It then jumped up to $8, fell back to $6, then back to $8 where it stayed for a couple of years before starting another big rally.

So you can see just how volatile silver can be. Moving from $6 to $8 is more than a 30% gain in just a few weeks, and falling from $8 to $6 is a 25% drop in even less time. This is a great example of the long periods of flat prices that are common in silver, too.

Since that time, I've been looking for silver to eventually make the move back up to test the 50% level of its big decline from 1980 to 2001, which would be in the $26 range.

Obviously, it hasn't made it there yet, but we're still holding. I'm willing to give silver much more room than gold because it's just so volatile.

I still believe that when silver eventually soars, it will rise very quickly and go much higher than anyone believes is possible.

Back in 2006, I estimated if silver could break above $25, it could make it to $50 in 2010, which is where it peaked in 1980. Of course, in inflation adjusted terms it would have to hit $130 to equal that peak, but I think we're a long way from seeing those kinds of prices.

So, first I want to see how silver acts when it hits the 50% level. Silver has fallen hard so far this year, but hitting this level as soon as this year is not out of the question.

Your readers may be familiar with the gold-to-silver ratio, which is simply how many ounces of silver it takes to buy one ounce of gold. Historically, this ratio has averaged around 16:1, meaning 16 ounces of silver for one ounce of gold.

So far, in this bull market, silver has not gotten below about 45:1, back in 2006.

At the end of last year, the ratio was 65:1. I wouldn't be surprised to see silver rise to a 16:1 ratio again, but I learned long ago not to make strong predictions when it comes to silver.

The way to best invest in silver is just to buy it and wait, but be prepared for some serious volatility.

Don't buy so much that you can't sleep or try to sell it every time silver falls. That's what silver does in a bull market.

My best advice is to buy it and just try to forget about it entirely. You'll sleep much more comfortably.

Crux: More great advice, Chris. You also mentioned holding cash now, specifically the U.S. dollar. This is in pretty stark contrast to many advisors suggesting everything from continued dollar debasement to complete currency collapse. What's your reasoning here?

Weber: Well, it's true that many people are calling for the dollar's demise, but I have to disagree, at least over the short term. There are a few reasons for this.

First, when you hear someone say the dollar will fall, you have to ask, "Against what?"

If it's other currencies, I would disagree. No other currency wants to appreciate right now. Many countries are actively printing more of their own currency to buy U.S. dollars to keep it from falling more. Some are devaluing their currency directly, like Vietnam just did.

If you look at a chart of the U.S. dollar Index, you'll see that despite its big decline since last year, it never traded below its bottom in the spring of 2008.

On a similar note, many of the currencies that did well in the past year have not taken out their old highs.

So here I look primarily at the charts. If the dollar were to break down to new lows versus other currencies, I would sit up and take notice.

But so far, it has held above the lows of 2008. Until or unless this level is violated, I will continue to hold my U.S. dollars.

I'm not saying the U.S. dollar is a healthy currency; I'm only saying that the other countries don't want it to fall more, and are willing to inflate or do whatever else they can to stop this from happening.

Of course, the main reason to be in cash is for liquidity and a degree of safety, so I generally advise readers to be primarily in their own currency, as well as another one which usually rises when yours falls.

For me, this is the U.S. dollar.

Crux: What do you say to the argument that the U.S. cannot hope to pay off its debts, and will be forced to either default or inflate its way out? Won't that cause a dollar crash?

Weber: Well, I agree. I personally can't see the debt ever being repaid. We crossed that bridge a long time ago. And I agree that at some point the only two options are to default or inflate, and either way taxes are going to have to go up and spending will have to go down. This means the standard of living for the average American is going to fall.

But the key here is timing.

The U.S. has no reason to default on debt as long as foreigners will still accept U.S. dollars in payment on the interest of it.

Today, because most other countries are dealing with the same credit-related problems as the U.S., the world needs cash, and for now the market is content with the 3%-4% interest rates on long-term U.S. debt.

Of course, at some point the world could – and likely will – realize that the U.S. cannot repay its debts or lose all faith in the U.S. dollar as you suggested.

That would be a serious problem, and it could quickly deteriorate into a downward spiral of the dollar falling and interest rates rising.

But we're not there yet, and it's possible that we may never get there.

Of course, I'm not willing to bet everything on that scenario, which is why we're holding precious metals.

I don't want to give the impression I'm a long-term dollar bull.

Ultimately, I think the place to be is in the precious metals. The key is to have enough cash on hand to get you through the inevitable corrections without having to liquidate your precious metals holdings to meet other expenses. So far, we're in good shape.

At some point, we'll get out of cash. But again, it's a matter of timing.

Right now, the big factors saving the U.S. from default are the global recession and the fact that there's just so much global debt and so little cash to service it. This makes cash more valuable. There also isn't really any alternative to the U.S. dollar as the global reserve currency at this point.

No other country is able or willing to have its currency take that place.

China needs a cheap currency, so it continues to tie it to the U.S. dollar, and the euro is obviously in no position to take its place.

You could object and suggest that all world currencies could be debased versus real assets simultaneously, but this is why we hold precious metals as well.

Ultimately, I think gold will come to serve as money again. I think the next decade will be the decade of gold.

Crux: Great stuff, Chris. Any closing thoughts?

Weber: We've been hearing a lot of talk about an economic recovery from the government and the media, but I have to wonder what they're talking about.

Are they suggesting that things are going to go back to the way they were in recent years, with people living above their means, buying houses and cars and more that they can't afford with little or nothing down?

I just don't see this happening.

Most of the developed world went through an insane period of debt creation, and I see these same countries working to reduce these levels for the foreseeable future.

Just look at Japan. They've had to deal with similar circumstance for two decades now.

It was at the end of 1989 – over 20 years ago – when Japanese stocks reached record highs. Even with all the inflation and crazy schemes they tried to get things going again, it just hasn't worked.

The decade that just ended has already become known as the lost decade in stocks. I wish I could say we're on the other side of these problems, but I just can't.

You can look at any of the developed Western countries, and you'll see stocks are much lower than they were 10 years ago.

Even markets like Hong Kong and Singapore have only risen slightly.

Only China and India are up big, but even they have not done as well as gold.

We're in a correction in gold right now, but it's only a matter of time before the rally continues. I still believe that gold and silver are in the midst of bull markets that will be historic in nature.

As you know, I've been making my living as an investor for close to 40 years now, having started when I was just 16.

And the only way to survive that long is to never take a big loss. You have to position yourself so that you won't panic when things don't go according to plan – and eventually they won't – and you won't be wiped out if you're wrong.

You also want to try to cover for all potential scenarios. Today, for me, this means sitting mostly in precious metals and cash.

Posted by Mr Thx Monday, February 22, 2010


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