For the past couple of years, there has been lots of investment buzz about gold. It seems like every time I watch television there are commercials from companies offering to buy gold, whether it is old jewelry, watches, coins, etc. While gold certainly has staged a nice rally, other precious metals have actually performed much better. Silver and copper, for example, both produced much bigger gains than gold during recent months.

The fascination with gold has existed for centuries. During the modern era, demand for gold has often been driven by investors who use it as a hedge against inflation. The run-up in gold prices the past couple of years has at least partially been attributed to speculation that continued government spending and growing debt will eventually result in inflation. As the price of gold has risen, there are those who believe that many investors have switched to silver as a cheaper alternative to gold. That could help account for the significant gains in silver during that time.

Below is a chart showing precious metals ETFs for gold (GLD) and silver (SLV) over the past six months. As the chart clearly shows, the increase in silver during that time is significantly greater than the gain in gold. Since the start of 2011, both have fallen off sharply.

The middle portion of the chart shows a moving average convergence divergence (MACD) for GLD. It turned negative in early January and is now at oversold levels. The bottom portion of the chart is a relative strength index (RSI). It too has dropped to an oversold level. While both of these indicators are oversold, that does not mean that an upturn in precious metals prices is imminent. There is, however, some light at the end of the tunnel for investors who have been waiting for a pullback to allow them an opportunity to buy into precious metals.

Today the Federal Reserve Open Market Committee reaffirmed that inflation remains under control and that it intends to keep its interest rates at historically low levels for an extended period. A strengthening economy along with low inflation rates has no doubt contributed to the recent decline in precious metals prices and could keep downward pressure on prices for the near future as well.

There are still plenty of experts who believe that a significant increase in inflation is inevitable. Nouriel Roubini, an economist at New York University, noted that the biggest threats facing the economy include rising fuel and food costs. In a CNN Money report today, he was quoted as saying, “When oil reached $148 a barrel in the summer of 2008, that was the tipping point for the global economy, led to a global recession. That rise in oil and commodity prices led to a significant negative effect on income and spending in the U.S. and Europe, Japan, China and India.”

He also said that the U.S. economy still must deal with massive national debt and struggling state and local governments.

Any perceived weakness in the U.S. economy could lead investors away from U.S. stocks and back to the security of gold and other precious metals. When and if that occurs, it could provide a good investment opportunity for those who missed out on the last advance in metals. Until then, however, there could be additional declines in gold.

Flint Stephens

In 2011, there are four changes in the Social Security program. For the most part, these are tweaks that will not have a significant impact for most retirees or for current workers. But because of the U.S. government’s current economic situation, additional and more significant changes are all but guaranteed in the future.

Imagine how you would react if you received a letter from your bank warning that it was insolvent. The Social Security Administration has essentially been doing that for years. Quarterly Social Security statements sent to program participants carry this warning:

“Social Security is a compact between generations. Since 1935, America has kept the promise of security for its workers and their families. Now, however, the Social Security system is facing serious financial problems and action is needed soon to make sure the system will be sound when today’s younger workers are ready for retirement.”

The next paragraph is even more explicit:

“In 2016 we will begin paying more in benefits than we collect in taxes. Without changes, by 2037 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits. We need to resolve these issues soon to make sure Social Security continues to provide a foundation of protection for future generations.”

The statement discloses that the numbers are based on assumptions from the Social Security Trustees’ Annual Report to Congress. Unfortunately, those estimates were too optimistic. Social Security began paying more in benefits that it collected in taxes in 2010—six years ahead of schedule. So far full benefits have remained intact and the deficit is being covered from the general fund of the U.S. Treasury. But given the continued growth of the U.S. debt, it is not possible to continue to subsidize Social Security benefits indefinitely, which is exactly the point the Social Security Administration is making in its quarterly statements.

The 2011 changes do little to resolve the imbalance between collections and benefits. In fact the most noticeable change will make the imbalance greater. For this year only the amount that workers pay into the Social Security trust fund will drop from 6.2% of taxable wages up to $108,800 annually to 4.2%. For self employed workers the Social Security tax rate will drop from 12.4% to 10.4%. This change was included in the bill that extended Bush-era tax cuts that was signed by President Obama on Dec. 17, 2010.

Another change beginning in 2011 is the elimination of paper benefit checks. Retirees who apply for benefits after May 1, 2011 will not have the option of having their benefit checks sent through the mail. Instead, payments will be directly deposited into a bank or credit union account, or loaded onto a prepaid Direct Express Debit MasterCard. Retirees who are currently receiving paper checks will have to switch to one of the other delivery methods by March 1, 2013. This change is expected to save Social Security more than $100 million each year by eliminating the costs associated with paper checks.

The final two changes for 2011 pertain to benefit payments. One eliminates a provision that essentially allowed some retirees to have free loans by beginning benefits at age 62, then paying back the benefits at age 70 and then reclaiming benefits at a higher rate. This loophole was primarily exploited by high income households with enough liquid assets to be able to pay back the benefits. The other change disallows beneficiaries from retroactively suspending benefits and paying back money received in exchange for higher future payments. Retirees will still be allowed to temporarily suspend benefits and restart them later, which can result in bigger checks to account for periods when payments were not received.

Washington politicians have known for a long time that they need to make changes in Social Security to ensure its future solvency. George W. Bush tried to make changes in the system during his presidency but got no support from congressional leaders. Now the date is fast approaching when Congress will no longer be able to ignore the fact that incoming revenue can no longer cover the cost of current benefit levels.

For investors this means that future retirees need to plan for a scenario that might include lower benefit amounts. This year’s minor changes are just a small preview of what the future will hold.

Flint Stephens

I originally wrote this information a week ago and then I got sick before I was able to get it posted to the Internet. As I reviewed it a week later, I found that the situation really has not changed.

At the end of 2010, major market indices had staged a great December performance and had reached extended overbought levels. It appeared a downturn in stocks could occur at any time. A week into the New Year, those indices are still rising and technical indicators are still showing an overbought situation; however, there is no certainty that a downturn is imminent. In addition to technical indicators, in recent weeks we noted that sentiment indicators are also at extended levels.

Below is a chart of the S&P 500 over the past six months. Below it are two technical indicators. The middle section is a moving average convergence divergence (MACD). Notice that at the end of December, the MACD actually crossed over—something that regularly signals a change in market direction. The bottom portion of the chart shows a relative strength index (RSI). When this indicator is trending above 50 that shows the index has positive momentum to sustain an upward trend. But when the RSI reaches 80, that signals an overbought condition and a downturn often follows.

We cannot definitively forecast an imminent correction based on these indicators. But we can say that because of the extended nature of these indicators, the risk of a correction is currently high. It could occur next week or it might not happen for several months.

We faced a similar situation in early November. A brief, mild correction followed and then the upward trend continued. It would not be surprising to see a repeat of that pattern. The next few weeks will include numerous releases of year-end data for 2010. Most of those are anticipated to be in line or ahead of expectations. If that proves to be the case, any downturn is likely to remain subdued and the long-term upward trend will remain intact.

A scenario like that described would provide a good buying opportunity for investors who have so far not participated in this rally. The rest of January should provide a good clue about market tone for much of 2011.

Flint Stephens