The combination of a stronger U.S. dollar, weak economic
numbers, and negative comments from Fed officials yesterday, led to
the worst one-day decline in the Dow Jones Industrial Average (
) since Feb. 23. And selling became more intense when it became
clear that stocks would again turn away from the psychologically
important Dow 11,000 level.
Weak economic activity in the euro zone in Q4 led to a flight to
the dollar and gold yesterday. And continued concern over Greece's
ability to finance its debt added to the rush to buy dollars.
Greece said its 2009 deficit would be slightly higher than
forecast, and sellers drove the country's 10-year bonds to their
highest levels in more than 10 years.
Fed Chairman Bernanke warned that, "the U.S. must start to
prepare for challenges posed by an aging population with a credible
plan to gradually reduce a soaring public debt" (Wall Street
Journal). Bernanke was quoted as saying that, "the U.S. will
ultimately have to decide between raising taxes, cutting Social
Security or Medicare, or less spending on everything from education
The market pullback picked up momentum following these comments
and data from the Fed showing that consumer borrowing fell $11.5
billion in February, which was much less than expected. More than
two-thirds of the economy is dependent upon consumer spending, so
improvements must come from that sector if the economy is to
) fell 2.1% following a 19% drop in fiscal Q2 earnings. But gold
stocks were strong with Barrick Gold Corp. (
), Goldcorp (
) and IAMGOLD Corp. (
) all posting sharp gains.
At the close, the Dow was down 72 points to 10,898, the S&P
) lost 7 points to 1,182, and the Nasdaq (
) fell 6 points to 2,431.
Downside volume on both major exchanges picked up moderately
with the NYSE trading 1.2 billion shares and the Nasdaq trading 693
million shares. Decliners were ahead of advancers by about 9-to-5
on the NYSE and 7-to-6 on the Nasdaq.
May crude oil fell 96 cents to $85.88 a barrel, and the Energy
Select Sector SPDR (
) lost 59 cents, closing at $58.99.
Gold for June delivery gained $17 to settle at $1,153 an ounce,
and the PHLX Gold/Silver Sector Index (
) gained 3.47 points to 176.05.
What the Markets Are Saying
Yesterday's selling was a reaction to unfavorable economic news
in a stock market that is very overbought. Technically, it was not
a major reversal, but if downside volume picks up and the indices
close below the 20-day moving averages of the major indices, stocks
will probably be in for a serious correction.
Here are the levels of the 20-day moving averages:
Dow -- 10,800.86
S&P 500 -- 1,167.05
Nasdaq -- 2395.25.
Now I'd like to pick up where we left off
in our discussion of gold.
For thousands of years, gold and other precious metals have been
the "safe haven" in time of economic, political and social unrest.
In times of war and international instability, and when currencies
lose value or inflation robs investors of their buying power, gold
has always held its own and most often even appreciated.
There are four ways to buy gold:
1. Bullion (bars)
3. Mining companies' stocks
4. Mutual funds or exchange-traded funds (
Bullion participates directly in the price of gold, but can be
illiquid and expensive to own. Storage, carrying charges, and
commission rule out bullion for all but the wealthiest
Coins are a choice if the investor wants to physically hold his
gold and admire the beauty of it. But owning coins can be expensive
with big spreads between buy and sell prices.
Both bullion and coins are priced to only appreciate if gold
appreciates. If gold were to remain stagnant for long periods of
time, holding charges will cost the buyers of bullion and
In my opinion, common stocks of the world's largest mining
companies are a good choice for owning an asset that appreciates
with the price of gold. The stocks are not only liquid (they trade
like any other stock), but the owner participates in the profits of
the company, and the best companies also pay dividends, which when
compounded over the lifetime of the investment, provide a superior
return to owning either the metal or coins.
The stocks of gold mining companies will often appreciate faster
than the price of gold itself due to the efficiencies of the mining
operation. But the reverse can also be true, i.e., when gold
declines, the mining stocks often fall faster than the price of
bullion. In addition, there is the company risk that comes with
owning any stock. In the case of mining companies it could be
mining disasters, poor management, and other unforeseen conditions
that could inject volatility into the price structure of the
In the past decade, another form of stock ownership of gold has
taken the lion's share of investors' attention, and for good
reason. Gold and precious metals funds, both mutual funds and ETFs,
provide a direct participation in the operations of the world's
best managed mines. Thus, the risk of a disaster in one mine is
mitigated by the diversity offered by the fund. And dividends are
pooled and paid to investors or reinvested, providing for a type of
dollar-cost-averaging. The cost of managing the funds is usually
low, and the initial cost is no more than a standard stock
According to Jim Cramer, "When people think about what
percentage of their portfolio should be insurance, they should
think maybe 20% and do it with a gold stock.
See our Trade of the Day for an ETF that has met
the test of time.
Today's Trading Landscape
Earnings to be reported before the opening
International Speedway, Pier 1 Imports and RPM.
Economic reports due: chain store sales, jobless claims (the
consensus expects 436,000), RBC CASH Index, EIA natural gas report,
Fed balance sheet and money supply.
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