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2011-Few Happy Returns
New York: January 02, 2012
By John Stephenson

For investors, 2011 was a year to forget. Surging bond yields in peripheral Europe coupled with bouts of intense volatility in the stock market made the year a write-off for most investors. Global stocks slumped, posting their first annual loss in three years, while U.S. equities barely edged into positive territory. Almost $6.3 trillion was erased from global stock markets this year as Europe 's crisis reverberated around the world. The euro ended the year as the worst performing currency while global stock market capitalization dropped 12.1 percent to $45.7 trillion.

The worsening of Europe 's debt crisis and ongoing jitters about the health of the Chinese economy encouraged a stampede into the perceived safety of U.S. Treasuries and the Japanese yen. So strong was the move into Treasuries that the benchmark 10-year yield, ended the year below two percent for the first time since 1977. Long-dated Treasuries rallied nearly 30 percent in 2011, while sovereign bond market investors shunned Italian, Greek and Spanish credits. Yields on Italian 10-year debt surged from a low of 4.80 percent at the start of last year to 7.08 percent by year's end.

Also tumbling were currencies, where the Japanese yen was the only major currency to rally against the U.S. dollar. The euro took it on the chin, tumbling more than three percent against the dollar in 2011, as Europe 's financial crisis dragged on.

With investors in a “risk off” mode for much of 2011, emerging markets in Latin America declined as did their currencies. Despite solid economic growth from the region, Brazil 's ibovespa stock index fell 18% on the year, while Mexico 's IPC index retreated 3.8%.

But it was gold that surprised the greatest number of investors, over the year. Gold soared as a safe haven in troubled times, hitting a record of $1,920 per troy ounce in 2011, only to tumble back to $1,563.70 per ounce. And while gold still recorded its eleventh straight year of gains, up 10 percent higher, it was its near 20 percent tumble in the last few weeks of the year that unsettled investors.

Despite persistent worries that the Fed was debasing the U.S. dollar and that Europe 's escalating debt crisis could cripple the global financial system, gold fell 18.5 percent from its September high. For many, the explanation is simple: gold as a rival currency moves in the opposite direction to the U.S. dollar. And with the dollar being the biggest beneficiary of the euro zone crisis, gold was sure to slump.

But Europe 's growing debt crisis is also ensnarling a critical cog in the commodities trading finance sector, worsening the short-term outlook for gold and other commodities. French banks, under tremendous pressure to recapitalize have been forced to slash their commodity financing operations. And that's a big deal, since Crédit Agricole, Société Générale and BNP Paribas account for roughly half of the lending to the world's commodities trading houses. With credit restrictions in place, small and medium-sized commodity traders and consumers are forced to run their businesses for cash, in turn forcing a run down in their inventories. This forced destocking is reminiscent of what happened in late 2008 and early 2009 when commodities plunged.

Gold is likely to be in for a bumpy ride in the first quarter of 2012 as investors continue to favour the U.S. dollar safety in an uncertain world. While the dollar still benefits from its status as the world's reserve currency, the U.S. is the largest debtor nation on the planet and the enormous amount of money that has been injected into the U.S. economy will lead to heightened inflation concerns.

Gold prices will also be supported by a dearth of new mining projects, scrap sales levelling off and central banks becoming net buyers of gold. Ukraine 's central bank plans to begin offering gold and silver coins, and gold certificates highlighting gold's increasing significance as an alternative store of value. And these solid fundamentals have most forecasters offering bullish forecasts for 2012. Most traders and analysts predict that gold could surge more than 35 percent in 2012 to over $2,140 per ounce.

As I mentioned last week on Bloomberg Television's Taking Stock with Pimm Fox , the go-to commodity sectors for 2012 are oil, copper and gold. Oil closed the year with a gain of eight percent, while gold which has been volatile lately, capped an impressive eleven year bull run with a ten percent gain in 2011.

Copper has the tightest supply/demand relationship of all of the industrial metals and oil has been remarkably resilient despite the global economic headwinds. Oil prices should be supported in the short-term by the sabre rattling out of Iran and the worries that if the situation boils over a confrontation over oil transportation through the Strait of Hormuz could be in the offing.

The volatility in markets is likely to continue in 2012, but for investors who are willing to step in, there are tremendous opportunities to profit from these gyrations. Gold, oil and copper and the companies that produce them are among your best bets for 2012. Good luck and good hunting.


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StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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