Caught in the middle of a 20-year bear market
We may be in a depression, says this U.S. technical analyst, who suggests you hedge with precious metals, like two Canadian stocks.
We are in the midst of a bear market.
And it’s a long one. It began over a decade ago and is due to last another 10 years.
In fact, we are in a depression.
But wait, you might say. There have been many indications that the economy is recovering, in North America and elsewhere.
But that is not the view from Bend, Oregon, where Mr. William John Kuhn publishes the Risk Factor Method of Investing. He has applied his technical analysis to the markets for over three decades.
He has different advice for different types of investors, but under the heading Long Term Risk, he urges everyone to “be sure to continue to use silver and gold as a hedge. Minimum 12% gold.”
In a moment, we will see what this observer believes must happen before the stock market can shake off its bearish skin.
But first we will examine the hedge portion of his portfolio, which holds several Canadian precious metals stocks. Mr. Kuhn also backs up his stand on precious metals by quoting from a Canadian advisory we know well.
Canadian gold and silver
For the “hedge portion” of an investor’s portfolio, Mr. Kuhn suggests five investments.
Two are Canadian precious metals stocks — gold producer Agnico-Eagles Mines (TSX/NYSE-AEM) and Silver Wheaton Corp. (TSX/NYSE-SLW), which mines no silver, but purchases silver “streams” from mines around the world and sells them on to the market.
Agnico-Eagle is trading at $60.79 and yields 0.3 per cent on its $0.18 dividend. Silver Wheaton trades at $15.57 and pays no dividend.
The third stock is the second-largest gold producer in the world, Newmont Mining (NYSE-NEM), which trades at $50.82 and yields 0.7 per cent on a dividend of $0.40.
Rounding out the hedges are two ETFs, SPDR Gold Trust Gold Shares (NYSE: GLD), which is trading at $109.44 and Silver iShares ETF (NYSE-SLV), trading at $16.81.
Backing up that hedge position, Mr. Kuhn reprints in the “Digest” section of his advisory an article from Investor's Digest of Canada. In it, noted Canadian analyst Mr. David Chapman discusses the long history of hard currency vs. paper money. His conclusion is that “the world is facing an unprecedented decline in the value of money along with an explosion of debt.” Hold gold, he urges.
Bone-crushing leg down
However much gold we may choose to hold, the market isn’t golden as far as this editor is concerned. In the late 1990s, this advisory began predicting that the Dow Jones Industrial Average would reach a plateau of 10,000 “that would become a barrier for the next 17 to 22 years.”
Right now, the Dow is at 10,559 in absolute terms. But it is much lower when you adjust for inflation, this editor points out.
This malaise won’t be over, he adds, until the average yield on Dow stocks rises to at least 6 per cent. For the most part, it has lingered below 3 per cent since the early 1990s.
“There are only two ways that can happen: companies begin paying much more in dividends, or the prices of stocks drop.”
What about the market rally of the past year?
“The current bear market rally we are experiencing is the initial reaction of the first leg down in the super-cycle bear market,” states Mr. Kuhn. There will be at least one more “bone-crushing leg down,” he adds, but his risk indicators suggest it may not come for many more months.
“I learned from my wife a long time ago that I am not always correct, but personally I believe we are in a depression.”
Four things must happen
In order for the Dow to climb beyond the 10,000 level, four things must happen, in Mr. Kuhn’s view.
First, trust must be restored to the market place. “I guarantee you it will be many years before trust will be warranted for those who are playing with our money on Wall Street,” he states flatly.
Second, trust must be restored in government. “Is there anyone out there willing to hazard a guess as to when that will happen?”
The third is less obvious. Mr. Kuhn believes that the 1886 Supreme Court ruling declaring that a corporation is entitled to all the legal rights of a person must be reversed. The U.S. Constitution makes no mention of corporations, he says. Corporations are not entitled to this protection.
Fourth, there must be an audit of the Federal Reserve Bank.
The only real glimmer of hope that this editor sees is in emerging markets. More shares were traded over the past year in Hong Kong and Korea than in Germany, he says. Emerging markets have less debt than the sagging developed world and those they have are more manageable.
But beyond that, he paints a bleak picture. What should investors do?
“Cut your expenses. Sit tight. Do nothing.” Wait until the Depression has run its course, he says.
You can find plenty of people to disagree with this gloomy point of view. But it’s always best to imagine the worst if you want to get the best results.
|
E-mail this article
Printer-Friendly
