The top-five performing sector ETFs last week were all energy funds, followed by materials, utilities and metals. iShares Silver Trust (SLV) gained 2.75 percent, but the fund has lost 22.52 percent in the past month; iShares COMEX Gold (IAU) added 0.93 percent last week but lost 11.42 percent over the previous month. Gold bugs and precious metal buyers are awash in speculation over a shortage of gold coins and silver bullion, despite the rapidly falling spot and futures price of gold and silver. The conspiracy calls for large paper sellers of precious metals in the futures market driving down the spot price, while the physical holders (central banks) maintain tight supplies.
The reality is that gold and silver were trading high on fear and a weak dollar, and when the financial sector rebounded and the dollar rallied, these trades reversed. Strong demand for physical metal caught the U.S. mint off guard, and a shortage ensued. And as with the housing market, when prices fall it is sometimes harder to find an asset at the market price, because sellers refuse to accept the lower price. They hang on and wait for a rebound, which may or may not come.
The episode provides more evidence that markets do not always function smoothly, they just happen to function better than anything else we’ve come up with. Should the prices of metals enter a constant decline (as housing has), eventually the sellers will give up and the market will be flooded with supply, signaling the bottom. More likely, prices will rebound and the higher price will entice holders to sell.
Investors searching for market bottoms are turning attention to China, where the Mainland market trades about 60 percent below its October 31 peak. iShares FTSE/Xinhua China 25 (FXI), which holds Hong Kong listed Chinese companies, lost more than 40 percent over the same period. FXI was the best international performer last week, however, rising 6.42 percent and making up most of the ground it lost during the Olympics. Part of the move was triggered by a report from J.P. Morgan outlining a potential stimulus package from the Chinese government, but today J.P. Morgan said the report was the result of internal research and not information from the government.
A bottom may be long coming for international shares if the dollar continues to appreciate. In the past month, only one long-fund has a positive return, iShares Turkey (TUR), up 8.10 percent. iShares S&P Global 100, which has about 45 percent of its portfolio in U.S. shares, was the next best performer, down 1.02 percent.
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Don Dion, publisher of Fidelity Independent Adviser, is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Massachusetts, Dion Money Management manages more than $750 million in assets for clients in 49 states and 11 countries. A licensed attorney in Massachusetts and Maine, Mr. Dion has more than 25 years’ experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management. http://www.dionmm.com/
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