(This is Part 6 of a series. Go back to Part 5.)
All the three interest-rate markets need is a triggering event to begin their long-term downward journey; in my opinion they are all high-risk right now.
Yet for technical reasons, stocks, bonds and real estate may hold up or even rally a bit for another two or three months. I wouldn't be surprised to see them make long-term tops in May of this year, give or take a bit, though they could do so at any time.
Bernard Baruch, who made the equivalent of $300 million in the financial markets in the early 20th century, had this to say about his market success: That he just tried to ride the middle 50% of a market move.
With that in mind, I personally would not want to hold positions in any of the three interest-rate markets right now. In my opinion, the risk involved in trying to capture that last bit on the upside is just enormous.
One’s personal residence is always a special case, of course. Whether you will want to hold onto it during a severe decline is a personal decision. If your home is
paid off and you love living there, maybe so.
In this as in all other investment decisions, it is vital to consult an experienced investment advisor who can be familiar with your personal situation. Remember, too,
I could be wrong. Only fools try to predict the future, hmm? My crystal ball could be cloudy. And in the end, markets will always go wherever they please.
But continuing my habitual jousting at windmills, let's now turn to the broad commodity markets, including the precious metals:
The thing to keep in mind about all these markets is that
they will experience periodic dips, perhaps violently so, even if their long-term bull markets remain intact. That's just the nature of markets: They don't go in straight lines to their destination; they zig-zag to it.
Consequently, I've learned not to chase markets. If a market is in a long-term bull (rising) trend, it's usually better to wait and buy it on the dips. That way, the loss
if we're wrong can potentially be limited with a fairly tight stoploss.
What's driving the commodities is a simple supply and demand equation. During the 1980s and 1990s commodity prices were in relentless decline. This caused investment in plant and equipment in this area to dry up. Money instead went into financial investments such as stocks, bonds and real estate.
As a result, there is a severe shortage of capacity in many commodities. For instance, no U.S. oil refinery has been built in the last 25 years, yet the number of refineries is half what it was then.
In areas ranging from copper to cement, investment in new supply has dwindled. Because of low commodity prices, companies have found it cheaper to acquire new supply by acquiring other companies rather than exploring for new reserves or building new manufacturing capacity.
Now this supply shortage is colliding with increasing demand. Consider this: The average American uses 25 barrels of oil a year. In China, it's 1.3 barrels of year; in India it's less than 1 barrel per year. What happens when 2.5 billion Chinese and East Indians start consuming just 3 barrels a year? Or just 5?
China's economy grew at the blistering pace of 9% last year; India's just behind that at 8%. Consumers in these countries and other emerging economies are beginning to want all the accoutrements of the consumer society in the West. What happens when half of the people on the planet start buying their first cars and washing machines? And demanding electricity from the wall?
Meanwhile, it takes time to ramp up supply; it can't be done overnight. The peak discoveries in everything from oil to aluminum to bauxite were made decades ago.
Further, the easy development in everything from natural gas to agricultural land was also made years ago. New development must be made in areas that are more remote, more hostile or simply more difficult. And then it takes a lot of time, effort and money to bring a new mine or well or farm into production.
This is why commodity bull markets tend to last 15 or 20 years, because it often takes quite a while for supply to begin to catch up with pent-up demand. And because of increasing population and increasing industrialization in the developing world, global demand could be increasing for years to come.
(This is the end of Part 6. Go to Part 7.)
—jim sloman, 03.08.05
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