The Year Ahead in the Stock Market… 2006

This article was originally published for RC Peck’s Fearless Wealth Newsletter in the 1st Quarter 2006.
Warren Buffet said, “Predictions are pointless and a waste of time” …

While financial predictions for the New Year are kind of dumb to do, making “educated guesses” about what might happen in the next eleven and a half months is, undeniably, exciting and fun, so, in spite of Mr. Buffet’s “pointless” comment, I’m going to give my “waste of time” predictions for 2006.

  1. The price of gold will stay above $500 an ounce for the entire year, starting its second stage of a bull market. There are three stages to any bull market, and gold has just finished its first stage (which, historically, is the shortest stage).The second stage is usually the longest of the three. Gold will hover between $500 to $550 an ounce for three to five months, BUT, if gold can hold above $550 for at least six weeks, then we might not see gold below that price for another ten years.You can play this bull market with the gold ETF (GLD), with the bell-weather stock Newmont Mining (NEM) or with a small cap stock like Vista Gold (VGZ).
  2. Interest rates will fully invert near the end of the year. To invert means short-term debt will be providing a higher yield than long-term debt. Usually long-term debt pays a higher yield because the borrower holds the money for a longer period of time and thus carries more risk.When short-term debt pays a higher yield, the market is indicating bad times ahead (read “recession”). Inversion will happen because China, Japan and South Korea are buying America’s long-term debt, which keeps the yield low on the ten year bond.Greenspan, the soon-to-be former Chairman of the Federal Reserve, has increased the short-term rate 13 times in a row. Unfortunately for Greenspan, the market controls long-term rates. His office doesn’t.
  3. The stock market, as measured by the S/P500, will do what it did in 2005. It will have a couple of scary months, like in April and October, but will basically stay positive about 5%.
  4. China will become the number one country in the world in terms of cash reserves. China will over take this position of strength from Japan. In 2006 China will have over $1 trillion in reserves and Japan will have around $900 billion.This will, of course, make China an even bigger player on the world market. China is already the world’s biggest exporter of IT goods, while the United States is number two.
  5. China will continue to bid up the prices of commodities like coal, coke, gold, silver, palladium, copper, oil, cement and steel, thereby creating inflation around the world.
  6. China will then take these raw materials and make consumer electronics, appliances and everything else you can buy at Wal-Mart, which will create deflation around the world. It will be interesting to see how China will continue to change the world’s order.

So there it is. Five predictions for 2006. We will know in eleven and a half months which ones prove true, which ones will be on the way to becoming true and which ones will be … well, worthless.

Looking forward to speaking with you in 2006.

With regards,
RC’s Signature