Prevailing Winds

Prevailing Winds

When the winds of changes shift      

               - Bob Dylan, "Forever Young" 

And shift they have those prevailing winds, blowing all investments in the direction of up. The only down players today were found on the DAX and CAC in European equities, although the one that counts, the FTSE in London, was in step with major U.S. and Asian indices. 

Gold, oil and crude are moving up rapidly, silver particularly so. But bulls who jumped in to trade gold last week should be very happy as upward action continued in shortened trading, hovering at the 1329/1330 level at market close.

The explanation is fairly self-evident: portfolio diversification.

The motivation behind the diversification is not so simple. 

As equities become more and more high priced, there is less and less room for growth/profit in the stocks. And there is fear that prices could take a tumble. The sensible thing to do, then, is to lay off some of your money as an investor onto the precious metals markets.

Why are the stock markets still going up then? Two main reasons. First, institutions like unions and pension funds are not finished rebuilding their portfolios. Second, there are still many good stocks out there, especially in the U.S. in the high-tech manufacturing sector drawing money. Media companies are also helping drive prices in aggregate up and up. Some equities that saw their growth last year spurt are a little ragged around the edges, however, and it is those stocks that are worrying investors.

Another motivating factor behind the movement toward precious metals is that many investors - especially in China - are coming to accept the notion that at least one phase of the party is over in the Asian giant, economically speaking. 

Westerners, in particular, tend to forget that like every country on the planet, China has debt. The national debt is kept in fairly strict parameters in China but regions (states) in China are leveraged to the breaking point. Newer cities - not world centers like Shanghai and Hong Kong - are also feeling a credit squeeze.

This lack of credit can only be fixed by more central bank lending, which would hurt national credit ratings, or by finding something else besides China's currency to back up what in the West are called "municipal bonds."

That something else in the eyes of China's moneyed elites is precious metals.

Seeing - or at least feeling - the buying surge of the big guys, consumers, "the old aunties in Ningbo," are following suit and buying gold. And more gold.

Meanwhile, over the Himalayas in India, people are getting no relief from the government and its poorly conceived tariffs on precious metals. Indians, who have no alternatives like the Chinese aunties, are slowly losing their minds. You can bet that is going to make many politicians lose their jobs next election cycle.