John Stepek highlights some of the best bits from our free emails
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that we’ve published in the past week.
● Commodities were the big story again this week. They were broadly lower over the week, but very volatile.
What’s the problem here? You can read more about it in the latest issue of MoneyWeek, where we talk about our favoured commodities. But the basic problem is this: commodities are a ‘risk-on’ play. The world’s investors are fretting about inflation in China and the end of money-printing in the US. That means they are increasingly in a ‘risk-off’ mood.
If the US economy shows signs of a rampant recovery, they might cheer up. But that might also mean a stronger dollar and higher US interest rates, which would tend to work against commodities.
But it’ll take a great deal of bad news to give the Fed the excuse it would need to do more quantitative easing (QE3). So between now and then (if it happens), I suspect that commodities are going to have a tough time of it.
Of course, if Chinese inflation does remain a problem, that could well be good news for gold.
● With silver yo-yoing all over the shop, Dominic Frisby – our precious metals writer – was in demand this week, even more so than usual.
He reckons that if the $33-an-ounce level holds, this might be it. But if not, the metal could fall as far as $22.
So what does John Burford, our spread-betting guru, think? He has spent the last week or so looking at the silver price charts and pointing out patterns that you can learn from. If I’m reading him correctly, he reckons that the ‘easy’ gains (if there ever is such a thing) from shorting silver have probably been made now.
“To win with silver, now we have had the wipe-out, you need to be very nimble. And don’t forget, that it is often prudent to pocket your profits and sit on the sidelines for a while until you see another great entry point.”
But that’s not to say there aren’t opportunities – both in silver, and elsewhere. If you haven’t signed up for John’s MoneyWeek Trader email, you should. It’s definitely made a difference to the way I think about my own occasional spread bets – John’s focus on money management is particularly useful for helping you to overcome your emotions. And it’s free. What more do you need?
● For all that commodities were the biggest headline-grabbers this week, as always, our articles on house prices were the most popular with readers. I wrote about the UK property market being an “unexploded economic bomb”. To cut a long story short, the fact that we haven’t had a proper housing crash is hamstringing the British economy.
The Bank of England is paralysed over taking action on interest rates for fear of sparking another plunge in prices. It’s like a filthy great sword of Damocles dangling over our heads. And it’ll make any UK recovery a very stop-start affair. At least that’s something the Federal Reserve doesn’t have to worry about – it’d be hard for the US property market to get much worse.
One thing that baffled some of you was the assertion from the Halifax that the average house price – at £160,000 – is 4.4 times the average salary. I checked out the Halifax’s methodology – they use the mean (as opposed to median) average salary for a full-time male worker in the UK. According to the Office for National Statistics, that clocks in at around £36,000 a year (the median is lower, at around £28,000).
So that means a retreat to the long-run average of four times would give us an average price of about £140,000. And for a fall to the 1990s trough of 3.1 times, we’d be talking about £110,000. Of course, being that specific is almost pointless. But it gives you a rough idea of the sort of ballpark falls it would take for prices to ‘revert to the mean’. You can keep an eye on what’s going on with house prices using the MoneyWeek indicators.
● Commodities guru Jim Rogers is a man we all like to listen to, and our editor-in-chief Merryn Somerset Webb had a chance to speak to him at the CFA annual conference in Edinburgh this week (it’s a big shindig attended by many of the most interesting people in finance, judging by who Merryn’s been chatting to).
You can read all about Jim’s latest favoured investments in Merryn’s editor’s letter in this week’s issue of MoneyWeek (If you’re not already a subscriber, subscribe to MoneyWeek magazine). But his talk with Merryn went beyond just investing – turns out Jim Rogers wants to pull down the whole of our current financial infrastructure and replace it with something better.
We’re not opposed to this view. We’ve never been big fans of central banks. But what do you replace them with?
Simple, says Jim. Return to ‘free banking’. What’s this? Says Merryn: “This refers to an environment in which there is no central bank and there are no special regulations for ordinary banks – no fractional-reserve ratio for example. Instead they can issue their own paper currencies as they like and the market will then set the price of money (the rate of interest) and the supply of money.
“Anyone can set up a bank in the same sort of way they could set up any other kind of company (as long as they adhere to corporate law). To do so they need no special government licence, just the capital required and the public confidence in them to allow their notes to enter circulation. If they make a mess of it, they end up bankrupt and the shareholders lose everything – they don’t get to call on the government for special help when they need it.”
Competitive currencies? It sounds radical. But it’s been done before – in Scotland up until 1845, in the US between 1837 and 1864, and in Sweden “for much of the 19th century”. And as Merryn puts it: “We spend a lot of our time arguing for free markets in most things, so why not money? Does it make sense for a central authority to spend as much energy as it does attempting to manipulate the money supply?”
We’ll be looking at the notion in more detail in the next issue of MoneyWeek (out on Friday). In the meantime, Elvis Presley seemed to approve: “The return of moral hazard – how quaint. It’s a huge leap in this dependent society. Who’s going to bail me out – well, ahem, no one. Gulp. Now that is a sobering feeling, no safety net.”
Have your say on financial reform and Jim’s idea here: How Jim Rogers would replace the Federal Reserve.
● Of course, at the moment, if you lose faith in your country’s currency, gold is about your only option as an alternative. The recent commodity havoc has hurt the yellow metal a little, but it’s been less of a casualty than silver or oil. To me, that makes sense.
What’s happening now in the markets is partly down to fear of money getting tighter. But if there’s a serious market collapse as a result of QE2 ending, then QE3 will eventually make a comeback. It might not be easy, as I noted in yesterday’s Money Morning. However, the threat of it will keep gold underpinned for some time, I expect.
Dominic gave his downside target for gold earlier this week, using the 144-day moving average. I’ll let Dominic explain it – but suffice to say it worked for him in January – indeed, he got the most back-handed compliment I’ve ever seen on one of our article this week, from Bazza. “I have to admit that Dominic’s last call about the late January low for gold was absolutely spot on – so I’m starting to come round to the idea that he might know what he’s talking about.”
● Here’s something you should read over the weekend if you haven’t already: MoneyWeek publisher Bill Bonner’s take on what really matters if you want to make a success of what you do, and not just in the financial sense. The key, says Bill, is “compound effort over time”.
I’ll let Bill explain what that means for you, but it’s certainly struck a chord with many other readers. “If only we had someone to make us think along these lines when we were still at school,” said Alan. “Bill’s thoughts here represent a profound insight into life that we should all, somehow, be taught when we are young.”
● And just to let you know – we had huge interest in our first MoneyWeek conference. We put the 300 tickets up for sale on Wednesday, and now they’ve all gone.
Also, we’ll be recording the sessions on the day and making it available after the event – we’ll have details on that later next month.
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Have a great weekend!
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