Gold, Silver and Other PMs
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» Normxxx - Deflation Dead? Yeah, Sure
Deflation Dead? Yeah, Sure.
By Rick Ackerman | May 6, 2004
[Although I have addressed the concerns of gold bugs at the top of this essay, the meat of it is near the bottom. Please feel free to skip ahead if you are eager to find out what is really on Mr. Greenspan’s mind.]
Sheryl F. is only a prospective subscriber at this point, but her letter comes first today, since it probably typifies the thinking of millions of newly despairing gold bugs around the world. She write as follows: “I sold 99% of my metals today. A commodities trader I know thinks Greenspan will increase rates, making the dollar strong and pushing metal shares down in the short- to mid-term, meaning six months to two years -- too long for me to hold.”
Let me say right off the bat that, bullish as I am on gold’s long-term prospects, I wouldn’t back up the truck to buy ingots at these levels. Although the HUI “Gold Bugs Index” made a bottom at 191.65 on Wednesday – exactly 0.28 points from where I’ve been telling you to expect an important low – it is still a speculative bet. Which is to say, it’s a great place to bottom-fish with a very tight stop-loss, but not a bottom on which I would bet the farm.
Moreover, if the HUI’s decline should exceed Wednesday’slow by a mere point or two, I’d be forced to consider the possibility that the slide will continue to at least 160, [HUI is currently at 168] where a supportive trendline going back 21 months comes in. My reliance on a conventional trendline instead of hidden pivots is dictated by the fact that there are no more hidden pivots left in this downtrend. Specifically, when the HUI touched 191.93 yesterday, that used up the last of them: 191.93 was the lowest low I am able to project based on the long-term charts.
Has the Dollar Topped?
Adding to the uncertainty about whether gold may have bottomed is the so-far failure of the dollar to reach the 92.46 (basis June) top I’d projected. Wednesday’s high at 91.53 left a bit of rally room, falling as it did between two crucial inflection points (the lower of which was 91.17). A further complication is that the June mini-euro bounced robustly yesterday from within 0.0001 points of a potential major bottom at 1.1804 that I’d advertised. [The euro was down 0.84 percent at $1.1976. Against the yen the dollar rose more than one percent to around 111.17 yen. June dollar closed Friday at 91.31.]
So, are corrective phases in gold, the euro and the dollar about to end simultaneously, as predicted here earlier in the week? Perhaps. But I am troubled by the performance of Newmont Mining, a crucial bellwether for precious-metals stocks that seems not to have bottomed yet. While yesterday’s carnage brought it down to 38.82, my downside target is a bit lower: 37.63. There is always the possibility that Newmont could get kicked downstairs one last time today or tomorrow while bullion quotes barely budge and the dollar blips slightly higher -- but again, I wouldn’t bet the farm on it [NEM is currently at 35.41.] It is nonetheless the best outcome we can hope for, since it would give us a hidden-pivot low in a key gold stock that is corroborated by a simultaneous top in the dollar at an important hidden pivot.
We’re well protected no matter what, and even starting to make a few bucks on the short side of some gold positions. But we cannot allow ourselves to become emotionally attached to the bullish case with precious-metals charts still pointing lower, as they are. Telling you that I do not believe gold stocks have entered a bear market is as much emotion as can be allowed.
[Normxxx Here: I have some gold gurus who believe just that! ]
‘Rate Hike’ an Idle Threat
Which brings me back to the theory that Sheryl F. finds so distressing – that “Greenspan will increase rates, making the dollar strong and pushing metal shares down in the short- to mid-term.” We should ask, what possible incentive does the central bank have to push interest rates higher in order to strengthen the dollar? For if either or both of those objectives is achieved it will tighten the noose around virtually all who owe dollars (and I mean mortgage borrowers in particular, although certainly not exclusively). Does the Fed risk toppling a global debt pyramid just to beat down the rising cost of milk, eggs, college tuition and fuel in the U.S.? I should think not.
Mr. Greenspan has flatly stated that deflation is no longer a concern, but let me give you the straight skinny: No matter what he says, it is his ONLY concern. We can also be certain that he would much rather talk about raising interest rates than actually raise them. Count on it. And don’t allow yourself to be distracted by recent increases in the prices of consumer goods and services; for they are no more than microscopic blips compared to a deflationary black hole that threatens to implode if even somewhat higher rates are applied to an estimated $150 trillion of very thinly collateralized derivatives. There is simply no alternative logic, and anyone who professes otherwise is either not in command of the facts, or a self-aggrandizing huckster like Larry Kudlow.
Concerning the supposed threat of inflation, we are all so deeply in hock that we should be praying for it, not hoping Mr. Greenspan will “fight” it. And if $50 crude and $3 at the pump should come to pass, do not mistake that for “inflation” either, since, rather than being passed along through the economy as inflation was during the 1970s, it will only stimulate a tsunami of deflationary bankruptcies in industries such as trucking, air transportation and automobiles. And if you do not expect your wages to rise along with the price of gas, milk, eggs, tuition and medical care, then those price increases will not be inflationary for you, but rather deflationary to the extent they will cause you to curtail the consumption of other things. It thus follows that, in a macroeconomic perspective, “inflation” itself has become deflationary.
-- posted by Normxxx
» Bill_Duffy - Re: Deflation Dead? Yeah, Sure
I've been following the value of the US$ to decide when it's time to buy gold stocks. The dollar today sits at its 50dma, down from an earlier peak. As expected, the gold stocks are beginning to rise; today NEM hit 40. It may be time to start buying. Furthermore, with an increased threat of terror, I think gold will become more attractive.As for Greenspan and interest rates, I don't think he will do much but the Bond vigilantes can do a lot of damage. Remember that the Fed controls only the short end of the yield curve, the market determines the slope. The Fed would have to buy long term bonds in vast quantities to reduce long rates. But I agree that increased long rates would be a disaster that would implode real estate and the banking industry. That indeed would be deflationary.
I used to be the President of the HP Credit Union and whenever we got a house back in foreclosure, we would always lose money.
-- posted by Bill_Duffy
» Bill_Duffy - Dollar Slide Continues
From the FT:FT MONEY - MARKETS WEEK WORLD: Dollar suffers widespread falls against rivals
By Steve Johnson
Financial Times; May 29, 2004
One story bestrode the currency markets like a colossus this week - that of the incredible shrinking dollar.
The greenback plummeted against all other leading currencies, prompting fevered suggestions that it could plunge back to the lows of February, when it reached an eight-year nadir against the (synthetic) euro.
"There is now speculation that the dollar may weaken [against the euro] back to the record London closing high of $1.2845," said Paul Chertkow, head of global currency research at Bank of Tokyo-Mitsubishi. "We are bearish on the dollar and have a six-month target for the euro of $1.32," added Mansoor Mohi-uddin, chief foreign exchange strategist at UBS.
The dollar's recovery since February, encompassing a 10-cent rise against the euro, was fuelled by expectations that the quickening pace of US economic recovery would force the Federal Reserve to double interest rates to 2 per cent by year-end.
This, in turn, led speculators to unwind dollar-funded carry trades - borrowing cheap dollars to buy more lucrative assets elsewhere - pushing the greenback higher. But by last week most observers had concluded this trend had run its course. What they did not foresee was that the presumption that rates would double this year would be challenged so muscularly.
First, the spectre of rampant oil prices raised its head, leading some to conclude that high energy costs could derail the US recovery, mitigating against the need for rapid rate rises and widening the vast US current account deficit.
When that threat eased towards the end of the week, the dollar bears turned their attention to a succession of soft US data, from three weeks of disappointing weekly jobless claims to yesterday's weak consumer confidence reading from the University of Michigan.
Calyon Investment Bank said yesterday that its economic surprise index for the US had fallen sharply this week and was now negative. "For the first time since March the US economy now delivers more disappointments than positive surprises," said Calyon's Kristjan Kasikov.
"More significantly, the US is currently the only major economy that delivers negative surprises."
With a correlation of 82 per cent between this index and the performance of the dollar against the euro, the greenback's slide was unsurprising, particularly with the likelihood of the Fed raising rates next month falling back from 90 per cent to 85 per cent.
As a result the dollar slid 2.1 per cent to an eight-week low against the euro at $1.2209, 2.5 per cent to a six-week low of $1.8326 versus sterling, 2 per cent against the yen to a three-week low of Y110.20 and 2 per cent to a three-month low of SFr1.2517 versus the Swiss franc.
Mr Mohi-uddin feared there could be worse to come, arguing that the dollar's decline thus far has been due to selling by hedge funds that slavishly follow technical models.
Thus there is scope for a further wave of selling if other market players are drawn in by weakening dollar fundamentals such as poor non-farm payrolls data on Friday. "The structural reasons for being short on the dollar are still in place," he added. "The US does not want to see a strong dollar ahead of the election."
A weaker dollar will drive Gold higher and it is also good for US stocks, especially big caps like GE or CAT because it makes US exports more affordable.
-- posted by Bill_Duffy
» Bill_Duffy - Re: Re: Dollar Slide Continues
OK, I'll take the bait. I'm not worried about the US$ falling, in fact, I'd like to take advantage of it. But why do you think it will bottom in June?-- posted by Bill_Duffy
» Normxxx - Re: Re: Re: Dollar Slide Continues
In response to message posted by Bill_Duffy:For one thing, I think there will be a very determined fight to keep the dollar up as it falls through 89 - 85, but also for partly cylical considerations and partly the expected action of Gold and bonds. Here's a further explanation from...
A Usually Reliable Source. . .
We hate to use the word crash to describe what has taken place in all of the financial markets, since the price damage was not as great as would normally be associated with that word. But the other types of internal damage (breadth, New Highs vs. New Lows) are consistent with what we see following crashes. What we also see following crashes are strong price rebounds, and we expect the same this time, leading to a top that is now due June 11-17. Gold should rebound in sympathy with stocks and bonds, but this will only be a rebound and then gold will finish this downward leg with a lower bottom due July 6-12. Bonds are poised for a strong upward period, and we should see prices generally rise (LT yields fall) between now and December.
From 5/21/2004: Gold Bounce Still Due, But Far From Looking Strong
The initial leg down from the April top got itself overdone, and now gold prices are on the rebound. Prices of gold stocks are bouncing back as well. One should not expect, however, that this is the beginning of the next great up leg for gold prices, for there is still more downside action coming. This bounce is instead just an opportunity to alleviate the excesses of the initial selloff, and put gold prices back into a more neutral condition to better support the continuation of a down move into the end of June.
The Price Oscillator for gold prices recently reached a reading that is as low as we have seen in several years. It describes an unsustainable condition, one which must be alleviated before the decline can resume. The short term downtrend line has been broken in gold prices, confirming the upturn in the Price Oscillator as saying that a bounce is under way.
If gold prices were really strong of their own accord, then the Gold/Dollar indicator would be acting much stronger than what we are seeing. Instead, it has broken its rising bottoms line and it remains below its 10% Trend. A strong gold market that was moving upward of its own internal strength (as opposed to dollar weakness) would be able to portray a much stronger pattern in the Gold/Dollar indicator.
This is not to dismiss the positive implications (for gold prices) of a weak dollar. In the short run, a falling dollar can have a very beneficial effect on gold prices and produce the sort of pop we are looking for. But for gold to mount a sustainable uptrend, it has to have strength on its own rather than relying merely on the fickle weakness of the dollar.
One reason to expect the dollar to give way a bit and allow for gold’s brief pop is the net long position of commercial gold traders as reported in the CFTC’s Commitment of Traders Report. The Dollar Index itself gives all appearances of breaking its own downtrend line, but the commercials are not confirming that breakout. Instead,
they are at their largest net short position since 1999, and these conditions are reliably associated with dollar tops. For that reason, we believe that the dollar will give way and allow gold the opportunity to make up some of the ground it has lost.
That does not mean, however, that gold is entering a sustainable new uptrend. We have seen too much other evidence which contradicts that scenario, and so the best that the gold bugs can hope for is a relief rally to correct the oversold condition before starting the next down wave.
Bottom Line: Our contention is that the January and April tops comprise a major top for gold prices, one which won’t get exceeded for years, and which will be followed by a 5-year bear market. The last 5-year bear market in gold ended in 2001, and you can look back to see what the COT numbers were doing back then. In order to get back to such a condition, this indicator is going to have to spend some time migrating back toward its zero line and below, so we are not too tempted by this current indication which seems low compared to more recent action. We still like gold for a continuation of this bounce from oversold toward a top due June 11-12, but there is more damage ahead.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only.
-- posted by Normxxx
» Normxxx - Re: CDE - Any Thoughts?
In response to message posted by mr_smart_e_pants:
No more than you could get off the web. But I have at least one guru I follow (see above) that thinks we will be in a 5-year Gold bear market post mid-June. Just sufficiently contrary enough to make me cautious of Gold until the end of this year. If he is wrong, nothing much lost; we will have a long bull market ahead of us. Gold mine stocks should be treated as highly leveraged options on the metal.
There will be no panic out of the dollar in the near term; too many CBs and countries have too much to lose. If I remember my numbers correctly the IMF just revised their growth figures for the international economy. Provisional figures showed that the U.S. contributed 96% of the international trade growth over the last 10 years. The latest revision shows that it was actually 98%!
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only.
-- posted by Normxxx
» Normxxx - The Secular Stock Market Trend --vs Gold
The Secular Stock Market Trend
by Steve Saville | June 15, 2004
Below is an extract from a commentary posted at www.speculative-investor.com on 13th June 2004.
Last year at around this time we asked the question: "Has a bear market started yet?" We thought this was a reasonable question because the NYSE advance-decline line had been trending higher for three years and several important sectors of the market were clearly not in long-term downward trends. And the question seems even more relevant today than it did 12 months ago because the NYSE advance-decline line hit an all-time high early this year, and although the senior stock indices have never looked like challenging their 2000 peaks many sub-indices have moved to all-time highs over the past 12 months. The question really doesn't exist, though, if we make the sensible decision to define the secular trend in terms of valuations rather than prices.
When we try to define secular stock market trends in terms of prices we run up against two problems. First, nominal prices are expressed in terms of a currency that is constantly changing. Second, when a currency depreciates as a result of inflation an effect, at least during the early stages of the inflation, can be higher earnings and higher stock prices.
It is possible, however, to eliminate the 'smoke and mirrors' effect that massive monetary stimulation can cause because over long periods the stock market has always differentiated between real earnings growth and earnings growth caused by inflation. Specifically, investors have historically paid less for earnings that stem from inflation than for earnings that stem from real (productivity-driven) growth. In other words, if earnings are being artificially boosted by currency depreciation then P/E ratios will trend lower.
Further to the above, if we define secular trends in terms of the average P/E ratio, as opposed to the nominal level of a stock-market index, the secular trends will not be obscured by changes in the value of the currency. For example, the below chart shows how long-term trends can appropriately be defined by the trends in the S&P500's P/E ratio.
The logical conclusion is that a secular bear market began following the major peak in the P/E ratio during the first two years of this decade and will, if history is any guide, continue until well into the next decade.
<img Width="520" src="http://www.safehaven.com/images/saville/...">
http://www.safehaven.com/images/saville/...
The one problem with defining secular trends in terms of P/E ratios is that the P/E ratio will sometimes fluctuate wildly during any given 1-5 year period. As a result it is really only possible to 'see' the trend in the P/E ratio when looking at very long-term charts, whereas during a normal investment timeframe the secular trend in the P/E ratio might not be evident or even relevant. Fortunately, there is a method of defining the secular trend in the stock market that gets around the problem of nominal prices being substantially altered by changes in the currency AND is of more practical use than the long-term trend in the average P/E ratio. The method, which we've illustrated on the below chart, is to let the trend in the Dow/gold ratio define the secular trend in the stock market.
Note: Gold and the US$ were officially linked prior to 1971 and this resulted in a very short and very sharp downturn in Dow/gold during the early 1930s followed by a very lengthy recovery into 1966, but if the US$ had not been convertible into gold at a fixed rate we suspect that the downward trend in Dow/gold that began in 1929 would have been more gradual and would have bottomed during the first half of the 1940s.
<img Width="520" src="http://www.safehaven.com/images/saville/...">
http://www.safehaven.com/images/saville/...
The above chart suggests that a secular bear trend in the stock market is in its early stages in terms of both time and price. In fact, if history is any guide the bear trend will end sometime next decade at a Dow/gold ratio of between 1 and 5. With the ratio presently at 27 this means that it would be reasonable to expect an investment in gold bullion to perform at least 5-times better, and perhaps as much as 27-times better, than an investment in the Dow Industrials Index if both investments were held over the next 10 years.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
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