What's Bubbling Over Now
If you got caught up in the tech or housing frenzy, you know the perils of lingering too long. We tell you which of these eight categories are in dangerous territory.
By Jeffrey R. Kosnett, Senior Editor
From Kiplinger's Personal Finance magazine, December 2008
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GOLD
Price: $948 an ounce
Buyable as: StreetTracks Gold Trust ETF (symbol GLD)
Gold, which sold for $300 an ounce in 2002, cracked $1,000 on March 17 and fell below $900 by the first week of April before recovering. Gold is seen as a hedge against inflation and political turmoil, but it has little use beyond jewelry.
Supply and demand are remarkably steady, so sentiment is the prime mover of price. Experts link the surge in gold to the weak dollar, fear of rising inflation and the collapse of real estate. Many investors and speculators apparently agree, as volume in gold surrogates -- mining stocks, gold funds and derivatives linked to gold -- continues to rise. Gold won't blow up soon -- it'll just correct as the dollar rallies mildly. The yellow metal should trade between $850 and $1,000.
SILVER
Price: $18 an ounce
Buyable as: iShares Silver Trust ETF (SLV)
Silver's value has climbed faster than gold's, up nearly fourfold since 2004. The silver exchange-traded fund has jumped 50% since August 2007. But the two metals don't always move in lock step.
Silver has more industrial uses, even with film photography slowly going the way of the horse and buggy. As a result, silver correlates more closely than gold with the overall health of the economy.
Silver also tracks stocks more closely. In a global bout of stagflation, gold will get the panic buyers and silver will be an also-ran. Between mid March and mid April, silver fell from $21 to $18 an ounce while gold has held up much better. Silver isn't in bubble-land; it won't collapse like the housing market. It's just not a great buy.
BRAZILLIAN STOCKS
Price: Bovespa index, 62,600
Buyable as: iShares MSCI Brazil Index ETF (EWZ)
The Bovespa is up 33% in the past 12 months and has broken even so far in 2008. The iShares ETF has gained 59% annualized over the past five years (just two commodity-oriented companies -- Petrobras and Vale -- account for half of the ETF's assets).
Brazil is a strong exporter of food and metals, and the country has vast new oil reserves and a strong currency. But the market's meteoric ascent puts it in bubble territory. Foreign money, chasing momentum, is still pouring in. In 2006, foreigners invested a net $15 billion in Brazilian stocks. Last year, it was $26 billion. In January 2008 alone, $3.6 billion arrived. The Brazilian market -- not its economy -- is overheated. Wait for a 20% fall and look again.
STEEL
Price: $880–$935 a ton
Buyable as: ArcelorMittal (MT), Nucor (NUE), Steel Dynamics (STLD)
Steel prices are up 50% since 2005, and news of another hike seems to come every week. There's no large backlog of inventory to stem the increases, which are the result of rising costs for coal and scrap metal, plus surging orders for construction. Even a deep U.S. recession wouldn't get in the way because so much steel is shipped to Asia, the Persian Gulf and Eastern Europe.
A basket of steel stocks is the way to invest. Even after stupendous share-price increases since 2003, the likes of Nucor and Steel Dynamics still sport price-earnings ratios in the teens. Global giant ArcelorMittal, based in Luxembourg, is up 2500% in five years but still trades at just 11 times earnings.
THE EURO
Price: One euro, $1.58
Buyable as: CurrencyShares Euro Trust (FXE)
or euro-denominated CDs from Everbank
From day to day, the markets seem to be of two minds. One day, a blow to the U.S. banking system or a weak economic report adds a penny to the value of the euro. The next day, someone says the currency's high value hurts European exports. The dollar gets the penny back.
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