Tuesday, May 17, 2011

Beef demand enjoys seasonal uptick - at last

by Agrimoney.com

Demand for beef has, at last, seen a seasonal pick-up ahead of the traditional start date for the US barbecue season, although analysts expressed doubts about the longevity of the rebound, and its impact on cattle futures.
Protein giant Tyson Foods said that sales of beef, chicken and pork had improved over the past two weeks, helped by warmer temperatures.
"We are happy with the improvement in demand we've seen following a cold, wet April," Donnie Smith, the Tyson chief executive, told investors.
"Demand feels pretty good for two weeks after Easter," he said, while adding that it was "not hardly where we wanted it to be two weeks before Memorial Day".
The US Memorial Day holiday, which this year falls on May 30, is typically viewed as the start of the barbecue season, and a period of higher demand for grilling cuts of meat.
Price hikes
The comments followed official data showing a steep rise in wholesale US beef prices on Monday, notably for the higher-quality choice cuts, which rose by an average of $2.73 per hundredweight to $177.52 per per hundredweight.
"Boxed beef values were sharply higher," US Commodities said, adding that beef sales had, according to weekly data, risen to their largest since October.
"The packers are now buying for the Memorial Day holiday."
'Demand could suffer'
Nonetheless, prices for choice beef remain nearly $10 a hundredweight lower than a month ago, and demand could yet soften again if fragile consumer demand is damaged again, US Department of Agriculture analyst Rachel Johnson said.
"If fuel prices increase much above current levels, household budgets are likely to be re-evaluated," she said.
"Demand for high-priced meat cuts could suffer as a result."
And US Commodities said that, with beef supplies set to be boosted over the summer as a knock-on of higher placements of animals on feedlots, it "remains negative throughout the summer" on live cattle prices.
Live cattle futures extended their slide on Tuesday, with Chicago's near-term June lot falling
Export factor
Tyson also highlighted in its comments to the BMO Farm to Market conference support from strong US meat exports which, for beef, soared 32% in the first quarter of the year, official data show.
"Exports, along with production efficiencies and value-added programmes, are driving our earnings," the group's fresh meats boss, Noel White, said.
US exports to Japan and Hong Kong rose more than 60% year on year during the quarter, with shipments soaring 194% to South Korea, whose own livestock industry has been devastated by foot-and-mouth disease.
Ms Johnson forecast that the rise in shipments would slow to 11% in the second quarter, and turn negative in the last three months of 2011, as supplies tighten again.
Tyson shares stood 0.4% lower at $18.44 in midday trade in New York.
In Chicago, live cattle for June stood 1.2% lower at 107.025 cents a pound, down 13% from the record high for a spot contract of 122.875 cents a pound reached early last month.

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Nasdaq Deja Vu

by Bespoke Investment Group

With the Nasdaq once again running into headwinds, many investors are getting an uncomfortable sense of deja vu. Since the Nasdaq peaked back in 2000, the index is now making its third attempt to break above 2,900. If the outcome of the last two attempts (declines of more than 50%) is any indication, it is not going to be a pretty Summer for Technology stocks. The bulls, however, are hoping that the third time is the charm.

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F for Fail

JEC Republican analysis of the impact of monetary policy on gasoline prices
I’ve been grading papers for the past half week, so when this popped into my mailbox this morning, I was in a “grading” mood. And when I finished reading it, I determined I would give it an F. From “The Price of Oil and the Value of the Dollar: Declining Value of the U.S. Dollar Adds to the Price of Oil and Gasoline,” Republican Staff Commentary (May 16, 2011):

Arguably, there are other factors affecting the price of gasoline than just the price of oil. However, the retail price of gasoline in the United States moves in tandem with the price of oil. In fact, the correlation between the two is greater than 98%. Given that oil is the primary input to gasoline and the close correlation we can perform a similar analysis to determine how much of the current price of gasoline is attributable to the declining value of the dollar.

The final chart shows what the price of gasoline would be if the value of the dollar had not declined. In other words, the dollar’s decline accounts for 56.5 cents of the $3.963 current price of gasoline. [emphasis added in bold - mdc]
Clearly, the objective of the study is to argue that QEI and QEII raised oil prices, I think by arguing that they caused inflation. Well, this may very well be the case, but here I’m just going to critique the analytics of the memo.

The JEC-Republican Staff Commentary Analysis

The core of the analysis is summarized by this graph from the Commentary:
F fail1 economy

What the authors have (apparently) done is to plot the price of Brent Crude, and then plot Brent assuming the Fed’s trade weighted dollar index (broad) had stayed constant at 2008M11, levels. The gap is $17.04, which they then convert to $0.565 gap per gallon of gasoline (by the way, the implicit conversion factor is slightly different from the 0.25 cents per gallon for a $10/barrel.

Math and Regression Estimates

This is an interesting procedure. It is so interesting, I don’t know why one would ever do it. I can certainly replicate it; since the dollar broad index is roughly 14.8% weaker in 2011M04 than 2008M11, then one can divide the actual Brent price by 1.148 to obtain a $15.85 dollar figure for 2011M04, close enough to the $17.04 cited by JEC-Republicans.

The analysis presupposes the relationship between oil and dollar were at equilibrium in 2008M11. More importantly, it presupposes a unit relationship between the two. The graph seems to suggest the existence of a unit coefficient, but regression analysis does not uncover such a relationship. Over the sample period shown in the JEC-Republican graph (2008M01-2011M04), ∂Poil/∂DOLLAR = 1.32 if the constant is suppressed (R2 = 0.27), and negative 7.92 if the constant is allowed (adj-R2 = 0.87).

Interestingly, the coefficients I obtain for the 2008M11-2011M04 period are remarkably dissimilar to those for the period conforming to monetary policy easing, starting in 2007M07 (when the Fed started dropping the Fed funds rate). Then, the regression coefficient (no constant) is 0.16. If one thought monetary easing was the culprit, this would be the right time to start the analysis, not with QE I. Re-doing their calculation, based on 2007M07, one finds the implied difference is only $8.85.
F fail2 economy
Figure 1: Current dollar price of Brent Crude (blue), and Brent indexed to 2007M07 value of inverted Fed trade weighted value of dollar index (red). Source: IMF, International Financial Statistics, St. Louis Fed FREDII, and author’s calculations.

Of course, one has to wonder if one can trust the correlation coefficients as representative of the underlying population parameters (technically, do the point estimates converge to the population moments?). I find that the series are integrated of order one, but the two series are only possibly cointegrated using asymptotic critical values, and a 5% significance level, over the sample period investigated by the JEC-Republicans. That relationship disappears if the sample is extended to 2007M07-11M04. (In log terms, Brent appears to be stationary, but the nominal dollar appears stationary, over the 2008M11-2011M04 period; and both appear to be integrated of order one for the longer period).

How about Some Economics?

When I teach econometrics, one of the things my students get sick of hearing is “correlation is not causation”. Nonetheless, I think it’s a warning that should be heeded in all sorts of instances — including this one. From the “commentary”:

Analysts and pundits often cite, correctly or incorrectly, the turmoil in the Middle East, a strengthening global economy, or speculation as the causes for the run up in crude oil prices. What is rarely discussed as an important factor in the rise of the dollar price of oil is the role played by the dollar itself. Oil is an international commodity that trades in dollars. The value of the unit of exchange, in this case the dollar, plays an important role in determining the “headline” price for the underlying commodity.
The authors of the commentary then rush headlong into modeling the oil price as a function of the nominal exchange rate, holding all else constant. As I noted in this post, such an approach is untenable.

while there is a negative relationship between the dollar’s value and the price of oil (in logs), that relationship is not statistically significant after accounting for serial correlation; nor is it significant in first differences.

Second, the idea that it’s just a numeraire issue — weak dollar implies more dollars per barrel of oil — does not seem to be consistent with a negative correlation between the real price of oil and the real value of the dollar, plotted in Figure 3.

In point of fact, one should expect two-way causality. A higher relative price of oil should weaken a country’s real exchange rate if it worsens the country’s terms of trade (i.e., the country is a net importer of oil). In addition, if the change in the relative price induces obsolescence of some of the capital stock, this would induce an economic contraction that might depreciate or appreciate the currency, depending on variety of assumptions (home bias in consumption, capital/labor ratios in the nontradable versus tradable sector, complementarity of capital and labor with energy, etc.). In Chinn and Johnston (1996) [pdf], a 10 percentage point rise in the real price of oil induces a 2 percentage real depreciation in a typical OECD country real exchange rate. That estimate relies upon exogeneity of real oil prices (an assumption not invalidated by the data).

Close readers will see that my discussion of how to apportion how much of the dollar decline is causing — versus being caused by — oil price increases is related to the issue of how to identify oil price shocks. There are numerous ways of accomplishing this goal. For one instance, see the IMF’s April 2006 World Economic Outlook Chapter 2, which uses a particular VAR to identify the shocks (thanks to Alessandro Rebucci for reminding me about this study). In that case, there is essentially zero effect of the oil shock on the real value of the U.S. dollar.
See also Jim’s 2008 post on the dollar/oil correlation.

Exploiting Other Correlations

Consider another correlation – between rest-of-world GDP and Brent. Figure 2 illustrates the strength of the relationship over the 2001Q1-2010Q4 period.
F fail3 economy
Figure 2: Log current dollar price of Brent Crude (blue), and log rest-of-world real GDP (purple). Source: IMF, International Financial Statistics, Federal Reserve Board, and author’s calculations.

Running a regression of log Brent on log RoW GDP (and current and lagged first differences) over the 2001Q1-08Q3 period yields a specification that explains a large proportion of variation in Brent. The Adj.-R2 = 0.96 (!!). (It’s 0.91 over the entire 2001Q1-2010Q4 period). In fact, this relationship rejects the no-cointegration null hypothesis at all conventional levels, unlike the exchange rate-oil price relation exploited by JEC-Republicans.
One can then ask how much lower oil prices would’ve been if RoW GDP had held constant at 2008Q4 levels: $10.78. A conclusion consistent with this view is that we could have had lower oil prices if only the RoW had stopped growing.
I don’t literally believe this result (nor the implied conclusion). What this exercise shows is that there are many plausible drivers of oil prices. Trying to tease out the impact of monetary policy on oil prices is a laudable goal, but trying to do it by assuming exchange rates have zero covariance with the fundamental determinants of real oil prices is a mistake.

What Would Be Better

Despite the previous assessment, I wouldn’t say the JEC-Republicans necessarily wrong in their estimate. Merely that if they are right, it would be by accident. In fact, one could come up with numbers that are bigger.
It’s incumbent upon the critic to propose alternatives. Before doing that, it might be useful to think of what could drive up oil prices denominated in US dollars:
  • US GDP
  • Rest-of-world GDP
  • Energy intensity of economic activity
  • Oil production capacity
  • Cost of production of marginal producer
  • Nominal interest rates
  • Inflation rates
  • Expected price of oil (itself a function of trends in the above factors)
  • Speculative activities of non-fundamentalist traders
  • Numeraire issues

The JEC-Republican study essentially focuses on the last point, assumes changes in the dollar’s value against other currencies has no other impacts on the underlying price of oil. For instance, this approach is consistent with dollar depreciation that induces no re-allocation of aggregate demand across borders, or alternatively, the oil intensity of the US and the rest-of-the-world is the same.
The above list of potential determinants suggests that one needs more than a bivariate approach, and a multivariate (multiple equation) approach is required: either a structural multi-equation model, a VAR or SVAR. From Alquist, Kilian and Vigfusson, “Forecasting the price of oil,” forthcoming Handbook of Economic Forecasting, edited by Graham Elliott and Allan Timmermann:

There are several reasons to expect the dollar-denominated nominal price of oil to
respond to changes in nominal U.S. macroeconomic aggregates. One channel of transmission is
purely monetary and operates through U.S. inflation. For example, Gillman and Nakov (2009)
stress that changes in the nominal price of oil must occur in equilibrium just to offset persistent
shifts in U.S. inflation, given that the price of oil is denominated in dollars. Indeed, the Granger
causality tests in Table 1a indicate highly significant lagged feedback from U.S. headline CPI
inflation to the percent change in the nominal WTI price of oil for the full sample, consistent
with the findings in Gillman and Nakov (2009). The evidence for the other oil price series is
somewhat weaker with the exception of the refiners’ acquisition cost for imported crude oil, but
that result may simply reflect a loss of power when the sample size is shortened.

Gillman and Nakov view changes in inflation in the post-1973 period as rooted in
persistent changes in the growth rate of money. Thus, an alternative approach of testing the
hypothesis of Gillman and Nakov (2009) is to focus on Granger causality from monetary
aggregates to the nominal price of oil. Given the general instability in the link from changes in
monetary aggregates to inflation, one would not necessarily expect changes in monetary
aggregates to have much predictive power for the price of oil, except perhaps in the 1970s (see
Barsky and Kilian 2002).

…there is considerable lagged feedback from narrow measures of money such as M1 for the refiners’ acquisition cost and the WTI price
of oil based on the 1975.2-2009.12 evaluation period. The much weaker evidence for the full
WTI series may reflect the stronger effect of regulatory policies on the WTI price during the
early 1970s. The evidence for broader monetary aggregates such as M2 having predictive power
for the nominal price of oil is much weaker, with only one test statistically significant.

A third approach to testing for a role for U.S. monetary conditions relies on the fact that
rising dollar-denominated non-oil commodity prices are thought to presage rising U.S. inflation.
To the extent that oil price adjustments are more sluggish than adjustments in other industrial
commodity prices, one would expect changes in nominal Commodity Research Bureau (CRB)
spot prices to Granger cause changes in the nominal price of oil. Indeed, Table 1a indicates
highly statistically significant lagged feedback from CRB sub-indices for industrial raw materials
and for metals.

In contrast, neither short-term interest rates nor trade-weighted exchange rates have
significant predictive power for the nominal price of oil. According to the Hotelling model, one
would expect the nominal price of oil to grow at the nominal rate of interest, providing yet
another link from U.S. macroeconomic aggregates to the nominal price of oil. Table 1a,
however, shows no evidence of statistically significant feedback from the 3-month T-Bill rate to
the price of oil. This finding is not surprising as the price of oil clearly was not growing at the
rate of interest even approximately (see Figure 1). Nor is there evidence of significant feedback
from lagged changes in the trade-weighted nominal U.S. exchange rate. This does not mean that
all bilateral exchange rates lack predictive power. In related work, Chen, Rossi and Rogoff
(2010) show that the floating exchange rates of small commodity exporters (including Australia,
Canada, New Zealand, South Africa and Chile) with respect to the dollar have remarkably robust
forecasting power for global prices of their commodity exports. The explanation is that these
exchange rates are forward looking and embody information about future movements in
commodity export markets that cannot easily be captured by other means.

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Making the Grade: A Guide to S&P’s Latest Credit Ratings by Country

Two Red Flags: Russell and the Hang Seng

By Global Macro Monitor

We note that the Russell 2000 broke its 50-day moving average today and the Hang Seng pierced its 200-day last night. We also just posted the S&P 500 looks ready to test its 50-day.

These two indices are key indicators of the global markets’ propensity to take risk. We’ve written several times of how the Hang Seng is the indicator species for global risk.

Sure we can bounce as it looks like traders are getting pretty negative and short here and you know how the market will punish when too many are offside, but the Russell and Hang Seng may be signaling a coming summer of risk aversion and capital preservation. No time to be a hero, in our opinion. (click here if table is not observable)

World Grain Production Expected to Recover

by University of Illinois

The USDA's report of World Agricultural Supply and Demand Estimates (WASDE) released on May 11 refocused the market's attention on world crop production and the implications for rebuilding U.S. and world stocks, says Darrel Good, a University of Illinois economist.

"The report reflects prospects for some modest increase in world feed grain stocks and prospects for maintaining world wheat and soybean stocks. However, substantial uncertainty remains," says Good.
World and U.S. feed grain production is expected to be record large in 2011-2012, nearly 6% more than was produced in 2010-2011. Substantial year-over-year increases in production are expected in the U.S., Argentina, Europe, Russia, Ukraine, Mexico and China. Much of the increase (84%) is expected to be in corn production, he notes.

Although world coarse grain consumption is expected to increase by nearly 2% during the year ahead, world stocks at the end of the 2011-2012 marketing year are expected to be modestly larger than stocks at the beginning of the year. Those stocks, however, are expected to be substantially smaller than at the end of the 2008-2009 and 2009-2010 marketing years, he says.

For the U.S., the USDA projects a record-large corn crop of 13.505 billion bushels in 2011. That projection reflects March corn planting intentions and a trend yield adjusted for planting progress, he adds.

"There is considerable uncertainty about corn acreage and yield due to late planting in many areas and extensive flooding along the southern Mississippi River and its tributaries. Some reshuffling of acreage from March intentions is expected based on rapid planting in some western areas, substantial delays in other areas, and the loss of some acreage," Good says.

Domestic consumption of corn is expected to stagnate in the year ahead as livestock numbers stabilize and ethanol consumption begins to plateau. Exports are expected to decline to a nine-year low of 1.8 billion bushels as a result of larger feed grain crops in the rest of the world, he says.

Year-ending stocks of corn are projected at 900 million bushels, or 6.7% of projected consumption, he says.
"The 2011-2012 average farm price of corn is projected in a range of $5.50-6.50 compared to the projection of $5.10-5.40 for the current year. The average farm price for the current year reflects very aggressive contracting of corn sales at relatively low prices. The USDA's estimates of average monthly prices received from September 2010 through March 2011 were well below the average spot cash prices in those months," Good says.

For wheat, the USDA projects a 3% increase in world production, well below the record levels of 2008-2009 and 2009-2010. Year-over-year increases are expected in India, Russia, Ukraine, Kazakhstan, Europe and Canada, he adds.

Good says that the largest decline is expected in the U.S. The National Agricultural Statistics Service (NASSA) forecasts the U.S. winter wheat crop at 1.424 billion bushels, 61 million bushels smaller than the 2010 crop.

Based on planting intentions and trend yield, the spring wheat crop is expected to total 619 million bushels, 104 million smaller than the 2010 crop. "Production is still very uncertain due to drought conditions in some hard red winter wheat areas and delayed planting in some spring wheat areas," he says.

The USDA projects a 50-million-bushel increase in wheat feeding this summer and a 225-million-bushel reduction in wheat exports during the year ahead. Year-ending stocks are expected to decline from 839 million bushels on June 1, 2011, to 702 million bushels on June 1, 2012, Good says.

The 2011-2012 marketing year average price is projected in a range of $6.80-8.20, compared to an average of $5.65 for the year just ending. Much of the 2010 crop was sold before prices moved sharply higher, he notes.

"World soybean production is expected to be record large in 2011-12 (0.5% larger than the 2010-2011 crop), although the U.S. crop is just being planted and the South American crop will not be planted for several months. Soybean consumption in China is expected to increase by 8%, and world stocks are expected to decline modestly by the end of the 2011-2012 marketing year," he says.

Based on March planting intentions and a trend yield, the 2011 U.S. soybean crop is projected at 3.285 billion bushels, 44 million bushels smaller than the 2010 crop. Consumption is expected to be 15 million bushels less than during the current year, resulting in a 10-million-bushel year-over-year decline in year-ending stocks, Good says.

"The 2011-2012 marketing year average price is projected in a range of $12-14, compared to an average of $11.40 for the current year," he adds.

Early projections of adequate U.S. and world supplies at current price levels resulted in price weakness following the release of the USDA report. "Now the market will monitor crop development to see if the projections materialize," he says.

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US Internet Stocks Getting Crushed

by Bespoke Investment Group

While the Dow and S&P 500 aren't down that much today (as of 3:30 PM ET), Technology stocks are getting hit hard. And it's the Internet stocks that are getting hit hardest. Below is a six-month chart of the Internet HOLDRs ETF (HHH). As shown, the ETF has now given up all of its gains from the breakout to new highs it made a few weeks ago, and it is now back below its highs from February as well.

Below are the top 10 holdings that make up the HHH ETF in order from largest to smallest. As shown, the biggest names (AMZN, EBAY, YHOO, PCLN) are the ones that are down the most today.

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Global Stock Market Performance MTD and YTD

by Bespoke Investment Group

Below is a table highlighting the MTD and YTD performance numbers (in local currencies) for the major equity market indices of 78 countries. The majority of countries have seen their equity markets decline so far in May. The average month-to-date performance of the 78 countries shown currently stands at -1.58%. Russia has seen the biggest drop in May at a whopping -9.00%. The Ukraine (-8.86%) and Greece (-7.27%) aren't far behind. Along with Russia, two other BRIC countries -- Brazil and India -- are down more than 4% in May. China has been the best performing BRIC this month with a decline of -2.13%. 

Along with the BRICs, all seven G7 countries are in the bottom half of the 78 countries listed in terms of performance as well. Canada is down the most of the G7 countries this month at -3.63%, followed by Italy (-3.27%), Japan (-2.96%), and France (-2.85%). Germany has been the best performing G7 country in May at -1.69%, while the US has been the second best at -2.07%.

On the positive side in May, Peru and Venezuela rank first and second with gains of 12.47% and 10.04%, respectively.

Looking at year-to-date performance numbers, Bulgaria ranks first with a gain of 21.87%, followed by Venezuela (19.23%), Sri Lanka (10.89%), and Iceland (10.51%). Italy is up the most of the G7 countries with a gain of 7.50%, while Japan is doing the worst with a decline of 6.56%. Russia had been one of the top performers year to date until it fell off a cliff this month, but it is still the best performing BRIC country in 2011 with a gain of 4.18%. India and Brazil have been two of the worst performing countries in 2011 with YTD declines of 10.55% and 9.27%, respectively.

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Relative Strength of Stocks vs Bonds

by Bespoke Investment Group

The chart below shows the relative strength of stocks versus long-term US Treasuries over the last year. When the line is rising, it indicates that stocks are outperfoming Treasuries and vice versa. While equities have outperformed Treasuries over the last year, the peak point of relative strength actually came back in early February. Since then the relative strength chart has been making a series of lower highs and is showing signs of rolling over. It is often said that the equity market tends to discount events six months out into the future, and if that is the case, then the equity market began to start pricing in the end of QE2 (end of June) right on schedule.

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by Cullen Roche

US Global Investors recently published a piece on “Why High Oil Prices Are Here To Stay” (certainly worth a read) with a very useful chart on oil’s seasonal tendencies. As regular readers are aware, I’ve been discussing the bullish seasonal trend in oil and gasoline prices for the entirety of the last 50% move in gas prices. The following chart puts that seasonal trend in perspective.

If we stay true to the trend we can expect oil and gas prices to remain buoyant into the July 4th holiday when the driving season officially ends. That is the point when risk in the oil markets becomes elevated – particularly given the recent surge in prices. If the 25 year trends holds true then prices could remain high into the late summer period and the hurricane season when storms can disrupt supplies. Either way, we’re nearing a point where the risk/reward in oil prices is deteriorating.

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Silver’s Bubble And Volatility

The recent plunge in silver prices provides lessons for all investors, regardless of whether you invest in commodities or not. As I started writing this on Thursday morning, iShares Silver Trust ETF (SLV) was down by 5.7%.

Though significant by itself, the decline was just the latest in what has been a very bad month for SLV shareholders. Since the start of May, the exchange-traded fund has fallen from $46.88 to this morning’s $32.42, a drop of nearly 31%. The drop is even worse when you consider that SLV hit an intraday high of $48.35 on April 28.

(Chart courtesy of FreeStockCharts.com)

Notice the volume bars at the bottom of the chart. Interest in the ETF has surged over the past six weeks. Any time a security jumps in price on high volume without a fundamental basis for doing so, trading becomes nothing more than a game of hot potato. Anyone who is simply trying to get in on the price action is banking on the greater fool theory–the hope that someone will pay an even higher price for the asset. Historical records going back to at least the 17th century Dutch tulip bulb bubble show the fallacy of such a strategy.

To be fair, the rally in silver was started in large part by the combination of the weaker U.S. dollar and fears about future inflation. As these concerns pushed gold prices higher, silver prices rose too. The theory is that a comparable valuation exists between gold and silver. The problem with this line of thinking is that over time the ratio of gold to silver prices has varied. The variance in comparative values between the two metals makes it difficult to pinpoint a magic ratio that suggests one metal is cheap or expensive relative to the other.

Furthermore, when people have economic fears, they reach for gold; when people fear werewolves, they reach for silver. Silver does have more industrial uses than gold, which mostly just sits there and glitters. The rise in silver prices was in no way justified by increased demand, however; a simple look at the economic data shows that. Rather higher gold prices and speculation accounted for the overwhelming majority of the gains in silver. This brings me to an important point: If determining a valuation is difficult and price movement can’t be tied to changes in demand, then figuring out when to buy and sell becomes nothing more than a guess.

The reason I don’t own SLV, or SPDR Gold Shares (GLD), is that I have problems valuing something with no cash flow associated with it. It’s always safer not to invest in something you can’t value, rather than guessing when to get in and out. Precious metals do have a role as a hedge against currency devaluation. They have stored worth and tend to be uncorrelated with stocks over long periods of time. A broad basket of commodities may actually work even better for diversification purposes (I personally hold a small position in a commodity exchange-traded note (ETN)), though I cannot emphasis enough the importance of having a thorough understanding of what you are investing in.

Finally, if you do use price momentum to gauge when to buy into and sell out of a security, consider the fact that many other people are looking at the same charts as you are. So take the extra step and carefully evaluate the fundamentals. A security with a fundamental reason to appreciate (valuation, rising earnings, strong financials, etc.) is less risky than one that lacks a fundamental reason to rise.

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