Wednesday, May 27, 2009

GM Saga Continues; Gold Becomes the New Oil

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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This is the last week for GM to arrange a deal with its bondholders in order to avoid bankruptcy - and things don't look good at the moment. While this has been weighing on the market for some time, it didn't prevent a huge rally yesterday that saw the Nasdaq zoom and close well above its 200-day moving average. This picture would be extremely bullish, if volume had been heavy instead of just average. Gold and silver were down slightly in the stock rally and this was odd behavior to say the least considering the Korean nuclear test. News coverage on the precious metals is beginning to resemble the negative coverage that oil experienced from February to just recently. Oil wound up basically flat on the day Tuesday, but was as high as $63.45 in European trading this morning. Look for $67.00 as the next resistance.

What has been going on with GM in the last few months highlights the extent of recent government incompetence in handling the U.S. economy. Federal policy from the last several presidential administrations has undermined our industrial base and built up the FIRE (Fire Insurance Real Estate) economy to replace lost manufacturing. Obama claims he wants to restore the balance. Unfortunately, none of his actions support his rhetoric. GM, which is the first major opportunity to help revive U.S production, has been handled disastrously. The Obama administration has interfered with the operations of the company as if somehow they know more about how to run a large industrial enterprise than people in the industry. They don't. While GM has been poorly managed for decades, it is still run better than the U.S. government.

Furthermore Obama's people have made demands that are improper and unlikely to be met in order for GM to get more bailout funds. No such demands were made on any financial institution that received TARP funds. While the unions have been more than cooperative, the unsecured bondholders have balked about accepting equity in exchange for their holdings. This was inevitable since they would be entitled to more in a bankruptcy, either through distribution of assets or by cashing in their credit default swaps - an action that would cost the financial companies receiving TARP funds a lot of money. Trying to force bond holders to accept equity is also an attempt to violate their rights under law. Who would want to lend capital in a country that does this? If the Obama people sat down in a room and tried to figure out an economic policy that would lose in the short term, lose in the intermediate term, and lose in the long term, they couldn't have done any better.

Lack of confidence, along with the massive money-printing operations of the major central banks, will continue to drive up the price of gold and silver. Don't expect to hear this from the mainstream media however. Some tidbits from today: 'Gold off for second day amid broad metals selling' (gold was down $2.20, a minor intra-day blip); 'The strong dollar has sapped some of the resilience that gold has been showing' (a quote from someone who has a $600 price target on gold and has been wrong about the price direction of gold for months, but that's not mentioned in the article and doesn't keep the media from quoting him); and 'silver skidded 4.5 cents' (but was still above the key breakout level of $14.50). I also particularly liked the coverage in the Wall Street Journal yesterday that said 'gold could go to a $1000 by the end of the year'. Now that's an earth shattering prediction. And to think investors who get their information from the media have trouble making money in the markets. I can't imagine why.

NEXT: Oil Takes Gas, Silver's Shining Moment, GM Watch

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

1 comment:

Frank Aguirre said...

You're so consistently well informed and a prolific writer!
Now going to check out oil, gold and hi ho silver!
frank, TEXAN in the big city