American debt, the long bear market and precious metals stocks
Add a runaway deficit to a lengthy bear market and you need to hedge, says a U.S. advisory that guards two Canadian precious metals stocks.
Debt is getting to be like the weather.
Everyone talks about it — or argues about it — but nobody seems to be able to do anything about it.
Average citizens are labouring to bring down debt, and surely many of them are labouring more efficiently than most governments.
While the chronic delinquency of nations like Greece fills the headlines, the largest ticking time bomb is undoubtedly that of the national debt of the United States.
One U.S. editor believes it’s time for the people in Washington to take an honest look at the problem — and raise the debt ceiling while they do.
This is made all the more important by the fact that we are in the midst of a “super-cycle bear market,” says Mr. William John Kuhn in Risk Factor Method of Investing.
That bear market started in 1999 and still has years to run, says the editor from his headquarters in Bend, Oregon. No matter how strong stock market rallies may seem, these bull rallies are still part of a bear market.
What’s more, long-term risk is much greater now than it has been for some time, says Mr. Kuhn.
“Be sure to continue to use silver and gold as a hedge,” he tells his readers. We begin by examining the hedge portion of his portfolio, which leads off with two Canadian precious metals stocks.
An anchor of stability
Gold and silver have reached historic highs — and suffered sharp corrections — in the first half of this rather volatile year. But they still serve as an anchor of stability in a sea of uncertainty for this editor.
His two Canadian hedges are gold miner Agnico-Eagle Mines (TSX/NYSE-AEM) and Silver Wheaton Corp. (TSX/NYSE-SLW). The latter owns no mines, but buys silver “streams” and sells them on to the market.
Agnico-Eagle reached a high of $88 in December and then descended into a lower trading range. It is trading at $60.04 today. It yields 1 per cent on the dividend of $0.62.
Silver Wheaton rose to a 52-week high of $45.50 in April. It, too, has moved lower to trade at $30.92. There is no dividend.
America’s biggest gold producer, Newmont Mining (NYSE-NEM), shows up in many portfolios. Trading as high as $57 in May, it is now at $52.47. The annual dividend, now $0.80, yields 1.5 per cent.
Two ETFs round off this hedge list. SPDR Gold Trust Gold Shares (NYSE: GLD) has risen quite steadily since February to sit at $148.93. Silver iShares ETF (NYSE-SLV) shot up to $48 in April and is now $34.81.
Bombastic polarization
America’s spiralling budget deficit offers a brisk incentive to hedge one’s bets. The statutory ceiling for the debt is $14.29 trillion. Today, the debt stands at $14.3 trillion and counting. Something’s got to give.
Democrats want to expand the limit by $2 trillion with no spending cuts. Republicans want deep cuts and no new ceiling.
Mr. Kuhn believes that both sides need to take a saner look at the budget. Everything should be put on the table — entitlements, military spending and increased tax rates.
Debts are “moral contracts,” he observes. “They keep us honest. They remind us we can’t do everything and have everything we want.”
Up to now, those in Congress have been sniping away at the budget from a strictly partisan point of view. This is “sadly ridiculous,” says the editor, as the debate degenerates into “bombastic polarization.”
“What happened to doing the wisest thing for our country,” he asks, “and as intertwined as we have become, for the rest of the world?”
For now, he adds, that means moving away from entrenched partisan positions, raising the debt limit ceiling immediately and then settling down to deal with the deficit in a sane and sober fashion.
Sounds like a tall order for Congress.
Another six to 10 years
In the meantime, Mr. Kuhn gets back to his bread and butter — measuring risk.
This long bear market began as the Dow Jones Industrial Average approached 10,000 in 1999. It should last “another six to ten years minimum,” states the editor.
For the time being, his risk models are relatively low. Risk is normal for the short and intermediate term. But that is changing.
Long-term risk appears 12 times higher now than it did at the beginning of the year. Overall Market Risk appears 21 times higher.
Mr. Kuhn publishes a chart stretching back to 1900. The previous three “super-cycle” bear markets lasted 18, 25 and 17 years respectively.
Of course there are many market rallies of varying length in those long bear markets, but they are still bear markets.
Governments around the world seem to be doing a slipshod job of managing risk. Surely individual investors can do better.
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