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The Quiet before the Storm

The US Treasury (Bond) market is ready to submit to the inflation argument, the gold price is about to reveal a physical shortage of gold as well as a crumbling global monetary order, the strong dollar policy is about to have the rug pulled out from underneath it, the blue chip end of the stock market is now precariously close to the precipice, and commodity prices appear to be revved up for another good leg. That is the point we've arrived at… but it's really quite quiet out there.

The Buying Climax
Forget about the managed slowdown hypothesis, or a return of the goldilocks theme, or a resumption of the new economy. Let's consider the now discredited "V" shaped recovery.

Why wouldn't last week's Fed inspired Dow Industrials reversal, for instance, foretell a reversal in fortune for the US economy? Well, first, the rally itself is not likely a reversal. It was a clear-cut buying panic in a bear market. A buying panic in a bull market is one thing - it is usually motivated by the fear of missing out on a good thing. But that isn't what seemed to occur here, last week.

For one, since it is a bear market the panic buyers were probably the professional shorts, hedge funds, and fund managers either locking in profits, preventing an erosion of capital, or liquidating their risk insurance, respectively. The point being that they were motivated by the fear of capital loss, not of not making enough of it. Nonetheless, a panic is a panic, and it is more often followed by reversal than continuity. Besides, since when does a government intervention, alter the primary market trend?

Still, what if the market is beginning to discount changing underlying fundamentals that are already turning bullish for the US economy? Indeed, what if the economy is picking up momentum now? But where would it come from? The consumer is showing signs of fatigue, the business sector appears to be over invested in the wrong places, which might account for the rapid slow down in capital expenditures that the FOMC refers to in its last policy statement, and lastly, there must be a drag on the US economy through trade - due to a strong (expensive) dollar, by this point.

In This Week's Issue:

  • We discuss 4 possible recovery scenarios but whether recovery arrives or not, the higher inflation rates will force the Fed to consider a reversal of policy, which is what the stock market neither wants nor expects. Accordingly, Goldenbar raises the stakes... forget about 2000, are you ready for a 3000 point tumble in the Dow Industrials next month? We are.
  • Commodity bears got railroaded this month, and it started even before the surprise rate cut last week. The oil stocks index suggests big things ahead for oil prices, and oil prices are confirming... meanwhile, gold prices and the XAU...
  • Dollar/Yen Bulls have reached their technical objective and now sit vulnerably at a primary resistance point near a two-year high at 125. They are overbought, and the focus is now on the fiscal developments in the US Treasury bond market as well as the Japanese Government bond market. The latter has been outperforming the former in recent days.
  • In a critique of recent analysis from the World Gold Council titled, World Gold Council; Gold in the Official Sector, Issue 15, April 2001, we take issue with their explanation (or lack of one) for higher lease rates. And to add insult to injury, wait until you read about Robert Skidelsky's dinner speech at a WGC function in November... Goldenbar renames the World Gold Council to the World Government Co-op!

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