Issue 25 • May 20, 2009

While Stocks Catch a Bear Market Bounce ...

This Market Looks Poised for Another Bull Market Run!

Anxious investors are still trying to gauge the longevity of this recent bear market bounce in stocks. Meanwhile, plenty of dollars are sidelined as investors search other asset classes offering more potential. After all, there’s usually a bull market found somewhere … if you look hard enough.

Even during last year’s wipe-out there were still some markets that held up quite well. Case in point, long-term Treasury bonds were one of a very few assets that showed any appreciation in 2008. Government bonds jumped +14% while the S&P 500 Index cratered -37%.¹

Treasuries were on the receiving end of a massive flight-to-quality trade last year, but this is not likely to continue with the same gusto as before. Today, longer dated Treasury bonds don’t look particularly attractive at recent levels, considering today’s relatively low interest rates. They look even more vulnerable when you consider the massive increase in Treasury supply that’s now looming to pay for Washington’s fiscal stimulus and bailout programs.

Luckily, there’s another asset class that also suffered a decline last year, but has shown renewed signs of life recently: commodities ... and specifically gold, which, in my view, hasn’t lost its bull market luster.

Will the Commodity ‘Super Cycle’ Continue?

Commodities have been one of the best performing asset classes to own this decade — far better than common stocks. In fact, since January 2000, the CRB Commodity Index has gained nearly +36% ... and this includes last year’s steep correction. Meanwhile, the S&P 500 Index plunged -40.6% over that same period.²

Clearly, commodities have enjoyed a robust bull market, even as equities have been locked in a secular bear market. Of course, this fact didn’t make it any easier on investors who suffered through the dizzying decline in commodities since last year. Crude oil, for instance, plunged over 75% — from almost $150 per barrel last summer — to a low of under $35 per barrel in December.³

Since then commodities have started to rebound amid hopes that growing global appetites for natural resources, mostly from China and other emerging economies, could offset the demand destruction in the U.S. economy, due to our contracting economy.

Crude oil has soared +51.5% so far this year, to a recent $60 per barrel. Other commodities have joined the party too. Copper prices, which are seen as a global leading indicator due to the metal’s widespread industrial uses, have jumped about +60% higher since January. The rebound rallies in these “real asset” prices have, so far, been much stronger than the gains in “paper assets,” such as the S&P 500.⁴

Glittering Gold Maintains its Bull Market Status

However, another commodity may be poised for even more glittering gains ahead: gold. Gold prices have, in fact, held up very well, relative to the global sell-off that hammered most other asset classes.

Gold has remained in a confirmed bull market, with its long-term uptrend during this decade still well intact (see graph).

There’s good reason to believe that gold, and other commodities, still offer solid upside potential from here too.

Commodities enjoyed their last secular bull market during the 1970s, a period remembered mostly for soaring inflation. But commodities, and especially gold, were also driven higher during this period by a secular devaluation in the U.S. dollar, after Washington abandoned the gold standard. Gold prices shot up +395% against the dollar from 1971 to 1975, in step with soaring overall inflation.⁵

That bull market in gold and commodities didn’t go up in a straight line either. After soaring over +170% in just over two years from 1972 to 1974, the S&P Commodity Index fell about -31% in just six months — and then moved sideways for quite a long time. But the commodity bull-run wasn’t over, however, and the index surged another +140% higher during the next phase — from 1977 to 1980.⁶

Is it Just Half-Time in This Bull Market?

Currently, the CRB Commodity Index is trading about -26% below its peak level reached last June. Commodities are now down a similar amount over a similar time frame, as occurred during the “half-time” of the 1970’s bull market. Does that mean commodities could double or more in the second half of this bull market?

It’s possible. But, gold, in particular, seems well-positioned for a number of reasons.⁷

First, gold is seen as a “safe haven” refuge for investors during times of trouble. The current financial crisis certainly qualifies, and I don’t believe it’s over yet.

Second, just as in the 1970s, the value of the U.S. dollar may be threatened by a looming loss of confidence in dollar-denominated assets.

The Federal Reserve has already embarked on a massive money-printing campaign in a desperate attempt to avoid a repeat of the Great Depression. In a deflationary environment like this, central banks around the world are also doing the same, creating money out of thin air and pouring it into the financial system with reckless abandon.

Gold Could Nearly TRIPLE in the Next Three Years

This means ALL paper currencies are vulnerable to lossing value against real, tangible assets that are viewed by investors as more reliable stores of wealth. This scenario is certainly bullish for gold ... and many other commodities going forward.

According to analysis by BCA Research, gold may be poised to soar as high as $2,500 per ounce over the next three years. That would be an upside move of up to +170% from today’s price — another significant leg higher for this bull market.⁸

At Weiss Capital Management, a number of our growth strategies hold positions in commodities, including gold, through mutual funds and ETFs that invest in both physical commodities, as well as funds that invest in stocks of commodity producers. We view these positions as an attractive hedge against continued volatility in stocks, and a potential devaluation of “paper assets,” including the dollar, over time.

Although it’s still in a confirmed bull market, and potentially headed much higher from here, it’s important to remember that gold, and other commodities, can also experience volatile swings both up and down. With this in mind, it’s important to use strict risk control guidelines, as we do in our professionally managed investment strategies. By following a disciplined strategy and with good timing, gold could be in store for glittering gains in the years ahead.

Good investing,

Mike Burnick
Director of Research & Client Communications
Weiss Capital Management, Inc.

¹ Ibbotson, FMR Co. (MARE) as of 12/31/08
² Bloomberg market data: 5/18/09
³ Bloomberg market data: 5/19/09
⁴ Ibid.
⁵ BCA Research Global Investment Strategy, 3/6/09
⁶ Bloomberg market data: 5/18/09
⁷ Ibid.
⁸ BCA Research Global Investment Strategy, 3/6/09; Bloomberg market data: 5/19/09