After the recent market crash you must be wondering whether the market is overreacting on the downside. Well, one thing is certain that the current economic data does not make a case for an ongoing recession in the economy. Obviously, we cannot rule out the possibility of the economy heading into recession in near term, but such panic selloffs appear to be overreactions to recent rating downgrade. Sharing few opinions along with my analysis and market strategy on how to play this crash.

S&P’s latest take on US Downgrade Decision

Markets may rise and fall, but as president Obama said in his public address speech that USA will continue to remain AAA investment destination no-matter what independent rating agencies have to say. I was hearing S&P president Deven Sharma in an interview on CNBC and he was quite discontented from Timothy Geithner’s statements that S&P’s decision about US downgrade was a terrible one. Deven also pointed that renewed sense of urgency from President Obama in addressing the debt issue is encouraging. He is concerned that the current debt levels will double by the year 2021. He says that going from AAA to AA does not mean that US will default; it just addresses the increased risk. He assured the audience that the rating agency did not take the downgrade action under any influence or pressure, and that they were transparent in their decision making.

Rising Fear & Panic: Time to invest?  

Meanwhile, the volatility index VIX is showing strong gains amid rising fear and panic among market participants. Now this could be a short lived reaction and the market could bounce back with full throttle as the weaker hands are shrugged out by smart money. I am very much convinced that this is a usual market correction and that there is not something very wrong with the economy right now. Yes, we will see a prolonged phase of low economic growth, but that is sufficient for good companies to post profits and grow. So, this might be a good time to buy some good quality stocks and ride through the panic scenario undeterred.

What to buy, Gold or Stocks?

Stock Market has closed down at 10 months low, and gold is trading above $1700, now the important decision would be to buy value investments. Gold might seem attractive as if it is going to breakout through the roof and stocks may haunt you in your dreams, but you should not rule out considering valuations before risking your money.

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Analyst View on US Economy

Mary Meeker on an interview on CNBC shared her views on current state of US economy and said that it is not likely that government will be able to cut down spending to less than revenues. But she believes that effective leadership can help the economy get out of the woods in the long term but in the short term she is neutral on the economy.

My Market Strategy and Trend Analysis

Now, after tracking all the opinions and ample reasoning, I strongly believe that a relief rally is on the cards. But that does not mean that I have changed my stance to bullish. I think the market top is capped at recent highs and the downside will be restricted to 10,000. So it will be a range bound market for a couple quarters, but trade will be extremely volatile. So, I suggest sticking to high dividend paying stocks, and you can read this post to checkout my top picks in this category.

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Long term investments in Gold have given high returns over the years. Its price has steadily risen over the past decade and the returns have been excellent, averaging a 17% annually. But a big cloud is looming over the mind of these long term investors, is Gold the ultimate bubble as christened by the famous hedge fund investor George Soros.

George Soros recently sold of a major share of his Gold holdings recently causing a scare in the market. His reason, he doesn’t see any threat of deflation on the horizon any more. Gold surges when the economy takes a hit, every time the deflation scare hits, gold sees a surge. And with the federal help given to the economy being wrapped up, now that the economy is stable, threat of deflation is at an all time low.

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Most investors worried about the gold being the ultimate bullion may chose to follow in Soros’ footsteps, betting against him can sure be expensive as the Bank of England once discovered much to their loss.

Since the starting of 2011 many investors have started to lose faith in gold, with nearly 2.5 million ounces of gold worth a staggering $3.8 billion having been sold. This massive sellout has brought down the price of gold by about 8%.

Signs That Gold Has Peaked

Rollback of QE2

Quantitative easing, part 2 is the market name for the second round of the Federal Reserve’s massive cash infusions to support the economy. It will soon see a rollback because the Federal agencies believe the economy is healthy now and the infusions are no longer necessary. This is widely believed to be a vital hint supporting the Gold Bubble theory that George Soros is supporting. Gold Prices have always seen an upsurge when the economy is unreliable and they fall when the economy stabilizes.

Inflation is under control

Federal authorities are expecting the inflation to stay low for the next few years. Sure inflation saw a rise in 2011 but it’s still low at 3%. Investors start buying gold when they sense inflation is about to rise which pushes the price of gold up. This seems highly unlikely right now.

The World Gold Council is reading the signs 

The World Gold Council is an organization supported and propped up by the gold mining industry. And the WGC has shown concern that Gold price might fall. They are concerned that with the withdrawal of the QE2 interest rates might see a hike. Such an environment affects all investments including Gold. And if the WGC is worried, it is one big sign of concern for gold.

The Dollar is climbing back 

“We have gold because we cannot trust governments”, President Herbert Hoover’s famous statement to Franklin D Roosevelt in 1933. 75 years later it sadly still holds true. Gold saw a great rise in demand when the recession loomed large on the minds of investors, and with the decline of dollar gold saw a rise in demand. It is seen as a substitute currency to the dollar. And now dollar is making a comeback, mostly pushed by other currencies in Europe suffering as a result of the economic crisis in Europe.  This doesn’t seem to be a good sign for gold.

Widespread Interest Controlling the Bubble 

40% of the demand for gold comes directly from the investors as compared to a feeble 16% in 2005. The demand for gold from the industry is falling as compared to investor’s demands. And investor’s interest is controlled by widespread speculation and discussion which could cause them to panic and start selling their stocks. It could be a repeat of the bursting of the tech bubble.

These are some sure signs that gold may have peaked and may be heading down. It is all speculation because you never know what the future might hold. A strong financial advice at the moment would be to not invest in gold until you see some signs of its recovery.

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It’s a general tendency to be temped to buy something that has more than quadrupled in past ten years. People around the world are chasing the gold glitters, as the prices are soaring higher. But, is it a bumpy ride, or there is something special about this yellow metal?

In the past decade stocks haven’t moved anywhere and the US dollar continued to lose value against almost every currency in the world. This is one of the major reasons why investors are readily buying gold at every level. Common masses are stashing gold in physical form; some are even taking their chances by converting all their savings into gold. What worse can you think of? Yes, they are burying it in their backyards.

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What people don’t understand is how an investment bubble can trap them? Take a look back and see what happened to tech bubble at the start of the millennium and then to the realty bubble very recently. Gold is no exception, it is rising in a similar fashion, and without a doubt I can say that the very basis of this rise seem flimsy.

Take a look at gold’s 10 year chart

As I promised in my last post, today I will share my thoughts on:-Why I feel Gold doesn’t deserve to be classified as an Investment.

Gold is purely a speculators play

Well, speculation driven purchases are made on the hope of selling higher, and believe me nothing else is factored in. Investment on the other hand is done with a purpose of generating income, and value appreciation in most cases such as real estate, bonds and stocks.

Most of you must have heard of Warren Buffett. His mentor and the father of Investment Profession, Ben Graham once gave an investment theory, “Greater Fool”, which I feel is apt one to refer to right now.

Just relate it to current trend in gold: – I know it’s foolish to pay such a high price for this investment, but I strongly believe that a greater fool is waiting to buy it from me at a much higher price. What if you are the last foolish one from the lot?

If you still don’t get it, let me put it straight. Gold does not generate income of any sort, it does not pay dividends and it won’t fetch you interest income and you obviously can’t rent it. Do you really want to take the risk of betting on this story, hoping that someone will readily buy it from you at a higher price than your purchase, and don’t forget the sale commissions and high deductions if it’s in ornamental form.

You can speculate if you wish to, if you completely understand the risks involved, but don’t confuse it with investing.

Don’t get swayed away by frothy gold

At present it might appear to you that gold is a store of value, but it’s not always like that. I researched through the web after seeing the gold chart from 1975 till date, and found that a similar phase went by in 1980, when puzzled by high inflation investors started pumping money into gold related investments. And, the end was not far, gold started to collapse in 1981 and this fall continued for two decades. By early 2000, gold had shred almost 70% of its market value. Even the current rally in gold that started in 2000 is building up froth on similar grounds, and all I can say is don’t bet with your money, the end to this story is very near.

How will fall in gold prices impact global economy?

What’s even more concerning is the fact that nowadays gold is being used more as an investment instrument, and its traditional use that of as jewelry is in a major decline in key regions such as India. Last time such a shift in use of gold was seen in 1980 and now you know what happened next.

Right now a crash in gold prices is very much predictable, but how it will pan out really depends upon government intervention, mainly US Federal Reserve and the Chinese Central Bank, as their policies can largely alter the course of this bubble.

A gold crash will bring a boom in developing markets

When investors fear the economic climate, they tend to switch towards precious commodities, which intern impacts the money flow that is required for growth in fast developing nations with ever-growing need for capital flows. Now, as and when gold bubble bursts, we will see an investment rush towards emerging markets. Although, it will worsen the inflationary environment, but with strict monetary policies these countries can very well utilize the money flow for economic development.

I do suspect a crash in gold prices in next few months, but I really don’t think it will be more than 30% initially. I have no idea what will happen to gold in the long run but right now it has surely reached the edge of the cliff. I know you traders are smart enough to position according to changing scenarios, but I am worried about common people who are speculating on gold rally, unaware of the kind of risk they are taking with their hard earned money.

Gold is not a real investment; you should systematically invest money in stocks, bonds, fixed deposits, and get yourself some insurance as well. Real estate is another good investment, don’t worry if you can’t afford one, you can always invest in mutual funds and ETF’s with real estate exposure. What more? One thing, don’t lay all your eggs in one nest, diversify as much as you can, and make sure you make reliable investments.

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Prevailing Scenario

Lately, the scenario has played like a see-saw both in commodities and in stocks. November started off well for both, mostly on the back of the second round of quantitative easing announced early in the month. Also triggered by the Republicans’ win in the congressional elections, sharp spikes were witnessed with the hope of a temporary boost in economic activity. Later in the month, buying activity slowed and selling pressure cooled off equities and commodities from their highs.

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Stock markets dealt very well with the prevailing issues surrounding Koreans and in Ireland, but commodities continued to correct on concerns centering China and its questionable growth rates. Meanwhile, dollar continued with its recovery and continued to put pressure on commodities.

Headed into Holiday Season

Now, we are headed into holiday season and then new trends can shape up in early 2011. Many analysts are of a view that dollar will remain firm in near term and some are seeing the end of the recent correction in commodities. One thing is for sure, that predicting investing trends in 2011 won’t be any easier than this year.

Commodity Watch List for 2011 Bulls

Bulls in the commodity sector are eying agricultural produce to hold the best performers next year. In 2011 food grains and sugar could mirror the performance that gold and silver showed this year. Precious commodities were the safe heavens of 2010, but now, expecting too much from these two won’t fetch much growth. They have already been pushed way too much and the chances are that they pause to take a long breather before moving further higher. Meanwhile, oil is emerging strong and bets are positioned to take it pass $100 mark by the second quarter of 2011. Oil currently trading around $85, is at the center stage as consensus is building in its favor and we can expect it to be the best performing commodity in the near term.

Cotton and the Consumer Pocket

Cotton prices have finally stabilized, as earlier concerns were building up that such a rise in prices will impact the demand for consumer clothing. As the consumer confidence is building up, now the question is will the rising commodity prices especially agricultural commodities and oil put pressure on their purchasing power. If the consumers shy away from spending in the early part of next year, all the bullish sentiment could be derailed and a market wide decline simply cannot be ruled out of the picture.

Where are the Wheat Prices Headed?

Wheat supply is under the radar as bad weather is expected to keep the produce on the lower side, which could eventually result in elevated prices of sheer necessities such as bread and other baked items. Traders should be positioned long on the wheat futures, as some analysts strongly believe that wheat price rise is almost certain this time around.

Long Term Bulls are shying away from Precious Commodities

Preachers of gold and silver or the long run bulls on these commodities are looking at other investment hideouts as they are of a view that the run-up in these two has been overly escalated and that it is wiser to let the prices correct and consolidate at rational levels.

Conclusion

Small investors are being warned to get out of the overstretched exuberance to chase precious commodities or else they could yet again become vulnerable to a sharp selloff in these commodities.

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Who should Invest in Precious Commodities?

When we mull over commodities sector for investment purpose, these precious metals top the list above all other available options. Throughout the world, long-term investing in commodity sector, particularly platinum, gold and silver has turned out highly rewarding till date.

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Even, investors with high risk tolerance have shown profound interest in precious metals as the equities selloff amid recent recession was deeper than anyone’s tolerance and money flowed towards secure assets. Investing in commodity becomes more accessible due to less capital requirement for trading in contracts of precious metals. This is one of the reasons behind increasing participation from the retail masses.

What you should not ignore About Precious Metals?

However, at the moment these commodities have already seen a fair bit of rally, so it becomes riskier to enter these for a short term gains.

The commodity sector is divided in three major categories- metals, agricultural, and energy sector, which are then further divided into several sub-categories. However, before investing in these commodity sectors adequate research and professional assistance is a must. Gold, silver and platinum investments pan out to generate best returns at a time when a recession is prevailing in the market and for the same reason they are known as crash-proof investments.

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Why should you Buy Platinum?

Although Platinum is quite famous amongst women for its ornamental purpose and is also used in creating auto-catalysts, a cleaning agent of diesel engines, investing in physical platinum might turn out to be little risky, however, platinum exchange trade funds are reasonably sensible investment option.

Reasons behind Ever Escalating Silver Demand

• Silver is considered as a conductor for heat and electricity and it is popularly used in industrial processes. One of the best features of silver is its flexibility and ductility which makes it a good candidate for industrial usage.
• Ravishing and stylishly garlanded ornaments are also available in silver which makes its demand highly fickle.

These two reasons encourage the demand for silver irrespective of the market condition.

Why does Gold Prices always Glitter?

Gold is always close to a woman’s heart as this yellow metal enhances her beauty with its glitter and this is the strongest reason for consistent rise in its demand. Its prices always glisten because of its demand as ornament and rising interest of investors. Basically investors consider gold as the best option to expand their trading portfolio as its prices doesn’t drops when an economy faces financial setback. This feature makes gold a sailing boat in financial inundation.

But gold trading is not safe for raw and fresh investors as huge investment is required for desired profit. Even long term investors require expert’s guidance and adequate research of market condition before investing in gold.

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Conclusion

Above mentioned statements shows that commodity sector is not for small investors rather it is a playing court for long term players. However small investors can buy them in shape of exchange traded funds which are comparatively less detrimental or physical gold.

Boot-up for the Financial Storm

Well, looking at economic data, may it be employment scenario, housing prices or consumer spending, your fears seem warranted. Unless, you are a compulsive stock investor, there are some safe investment bets that you can hold till the crisis scenario completely plays out. Gold has been on the rise since the stocks entered their downtrend, and many would argue if it’s another asset bubble in the making.

Demand for gold has always been there and even its supply has been on a consistent rise till date. But the recent spurt in demand for gold has led the prices rocketing higher, concerning value investors, at a time when there are a very few safe investment options available. So, the question is if there is another storm in the financial markets, does it makes sense to invest in gold at such high levels?

Gold Rush- Are glitters here to stay?

Well to answer that I’ll ask you another question. Where do you think the money will flow if economic growth flattens out and stocks take a wild hit? No doubt, the Fed is ready to go to any extent, but all it can do is print more money, which is not a durable fix to the situation. Gold along with other precious metals will surely continue the up move, whether the prices are justified or not, till the economy remains submerged.

Ideally considered as a perfect hedge against inflation, this time around it’s even bigger as gold is gaining popularity on concerns of hyperinflation. Such alarms are being pressed as Fed is desperately pumping cash into the system to avoid deflation. The economy has shown a slight rebound in the first and second quarter on the back of renewed consumer confidence, but concerns prevail due to systemic risks, which can lead to a much worse economic times than what we witnessed in this recession. So, we can expect gold to glitter, no matter if the prices may seem over stretched to investors chasing value.

Is there too much Hype?

Smitten by the gold rush, analysts believe that there is still more to come, as when compared to hyper inflationary pricing that gold enjoyed in 1980’s there is still room for another 30% upside. On the face of all this, deflation worries that are looming investors, if come out to be true, then fasten your seatbelts for an unknown territory, as then no price barrier will stop gold.

We can conclude by saying that gold with its resilience is a crises commodity and limited supply is another factor that keeps the price trending higher. But all this does not make gold a holy commodity as it may seem to many in current conditions. It can fall back on you, if there is unprecedented change in the economic conditions, so plan your investment effectively and don’t let the charm of gold take you blindfolded.  Making direct investments though commodity exchanges is not advisable given the nature of contracts, but you can opt for Gold ETFs and physical purchases in bar and coin form.

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