We remain in preservation mode, of which Gold is a part of the plan. However Gold continues its parabolic move upward so we’re seeing modest growth despite market weakness. My estimation is that Gold and now Silver are rising in anticipation of Bernanke’s speech in Wyoming at the end of the week. I zero expectations that Bernanke will present anything other than the next form of Quantitative Easing which will likely fail again.
If you’re an investor who’s stymied to make a decision against all the noise I’ll try to boil it down in a simple to understand process:
1. If the economy does not erode much further and if the European banks do not suffer a major failure then the chances are good that we’ve seen the market low. Selling at this point could be pointless as we could grind higher to the end of the year.
2. If the economy in the US continues to erode and lead us into another recession then don’t wait for the analysts to inform you that the recession is here, do some selling into rallies. Bear markets act quite differently then Bull markets. Bears tend to have very sharp up moves which fail quickly so you must be alert and when you see a high volatility day on the upside, pare back your equity funds. In general, recessions cost S&P earnings on average of 22%. Based on the most recent peak this could put the recession earnings estimate at $75. Apply a 10x to 12x P/E to $75 and you have a downside target in the range of 750 to 900 on the S&P 500. That could mean another 35% to the downside.
3. A major European bank fails. Sell first, sell anything. Europe has their Lehman moment and the risk to US markets is the ripple effect of the need to access capital. Gold will likely take a short term hit in this scenario. Downside risk to equities, see 2.
As the wise man once said: “This too shall pass”. Its not the end of the world but you must keep your eyes open and be aggressive in preservation of capital.
1:33 pm mst Credit Suisse lowers 2012 eps estimate to $85. First major bank to do so.
Long GLD, SLV