Week Ending 10/01/10
The Golden Constant
There are a couple of main points or themes that I want to expand on. The first is the risk on versus risk off trade; and the second is how market dynamics have given rise to changes in inter-market relationships between various asset classes.
For months I have mentioned the risk on versus risk off trade. In a nutshell it goes like this: the risk on trade exists when investors have confidence that the global recovery is alive and well.
The recovery is a based on the belief that the world's central bankers are in control of the global economy through their monetary policy of intervention and reflation; thereby injecting credit and money into the world's economy to give it a boost.
When investors believe that all is well with the economy, they are willing to take on risk and invest in stocks and commodities - assets that carry more risk and hence offer greater profit potential. Money moves out of safer assets like T-bonds and into stocks and commodities. As a result, bond prices fall, while stock and commodity prices rise. This is the risk on trade.
The risk off trade is when investors lack confidence that the central bankers are in control. The global recovery is not considered a certainty. Investors are not willing to take on risk or chance - they flee risky assets for safe havens. Money moves out of stocks and commodities and into T-bonds, the yen, and gold (charts available for subscribers).
Earlier this year there was the Greek Sovereign debt crisis, which precipitated a mass exodus out of the euro. The euro fell off a cliff, dropping relentlessly from Dec. 2009 until June 2010.
During this mini-crisis, the dollar became the go to currency, and it rallied strongly. The risk off trade was in control. Just prior to this event, the dollar was on its death bed, and about to go under for the last time.
The inter-market dynamics of this flight to safety play are telling, as the dollar moved higher along with bonds and gold. This makes for a very odd couple to say the least. Generally the dollar and gold move in opposite directions. The one other time they moved higher together was during the financial crisis of 2008.
Prior to these occurrences, the euro and gold moved in the same direction and opposite to the dollar. Now, we had gold and the dollar moving together opposite to the euro; at least for awhile.
Since June of this year, the euro and the dollar have reversed rolls: they act like the two faces of Janus. Now, the dollar is in a mini-crisis and the euro is rallying strongly.
In the face of all this, one thing has remained constant: gold. Gold keeps rising higher no matter what. It doesn't care if there is a euro crisis or a dollar crisis. Gold is the ultimate store of value and performs best when paper money is seen for what it is - mere promises to pay that cannot be kept.
Only in paper fiat land can such bizarre non-monetary policy occur. It is truly amazing, especially that we the people accept it. We should not accept the unacceptable.
Congressman Ron Paul's call to audit Fort Knox and to end the Fed should be heeded. He is one of the seers who predicted the financial crisis; AND has a plan to fix it: a return to the Gold and Silver monetary system mandated by the Constitution.
Recently, the stock market and commodities have rallied, WHILE gold continues to set new highs on a daily basis. What's up? Is the risk on or the risk off trade in control? Or like the chameleon has it changed its color?
It doesn't appear that either trade is in control; otherwise, why is the stock market (risk on) going up along with the ultimate safe haven (risk off) asset - gold? And to top it all off, we also have bonds moving up along with stocks, commodities, and gold.
Something doesn't seem right. One day the world questions if the financial system or one of its currencies is coming to an end; and the next day almost every asset class rises in price, while gold is making all-time highs. Yet until last week, oil - the lifeblood of the economy, has been dead in the water.
I don't like the fact that these inter-market relationships are changing and in some cases breaking down so readily. It would seem to indicate that the financial system is unsound and under a lot of stress.
Hot money flows seem to dictate what goes up and what goes down; while the excess credit the central bankers have created sloshes around the world - in one port for a night and then on to another. This creates volatility and undue risks. The pressure is rising and it will have to be relieved somehow and at some point.
Bonds and stocks will not continue to rise together - one or the other will change direction. For now, the dollar is down and out and the euro rules the roost. Greece was the tip of the ice-berg. There is much more to come; and the euro has an appointment with destiny.
But make no mistake about it, U.S. T-bonds are the bubble of all bubbles, and they too await fate: Franz Pic called them notes of confiscation. Gold seems to remember this all too well.
So, what is an investor to do in the face of such volatility and uncertainty? The answer is easy. What has remained constant through all the last decade of twists and turns the markets have taken? Gold has. Gold is the only bull market existent and should be acted on accordingly.
I have been getting emails from subscribers asking if they should buy more gold at these prices; or gold and silver stocks. A few have asked about going long the stock market as well.
First, per our model portfolio, core positions are highly weighted in gold, silver, and the pm stocks. These positions are held for the long term. Part of the model portfolio is allocated for trading - swing trades, not day trading or the like. This is where our stock watch list comes in.
Some of the stocks featured over six months ago and again almost weekly since have appreciated 50% and more: Newmont, Randgold, Eldorado, Silver Wheaton, and Stillwater.
The answer to whether gold and silver should be brought at these levels is: only if you are buying it as insurance against currency debasement over the long term. As of yet, this is not a runaway bull market, but it could turn into one. Even runaway markets correct, however.
Gold rising to $1300 dollars an ounce was no surprise and was expected. The Oct. 9, 2009 Market Wrap Report had the following to say:
The weekly chart shows the inverse head & shoulders formation finally confirmed with last week's breakout. All the indicators are in positive territory.
Broken resistance now turns into support. Once support is tested, and holds, the next phase in the gold bull will be off and running. The upside target potential is 1300 (1000-700=300, 1000+300=1300).
Here is the chart from the Oct. 9, 2009 report that showed the head & shoulders formation:
Where do we stand on gold today? We remain bullish long term and would look to enter new positions on pullbacks that hold support. In the latest report we stated:
Notice on the chart how the 150 dma has acted as support since 2009, and that any corrections to the moving average have represented good buying opportunities: the old - in a bull market buy weakness that holds support. So far, it has worked.
In other words we wouldn't be s surprised to see gold pullback around $100 bucks from here to throw off the late comers to the party. As long as the 15 holds it will be like the rest of the corrections on the chart below.
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