Investors Chase Phantoms

By: Peter Schiff | Fri, Aug 22, 2008
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In football, when a running back intends to cut to the left, he often first fakes right. This move is designed to make the defense commit their resources in the wrong direction. It is my experience that markets often follow a similar path. Just prior to a major move in one direction, markets often make a sharp move in the opposite direction first. With respect to the dollar, gold, oil and other commodities, many on Wall Street have bought into the head fake, and will soon be watching in amazement as the runner sprints to the end zone.

Over the last few months, as the dollar rose more than 10% against a basket of other currencies, and as gold and oil sank to multi-month lows, many investors concluded that a threshold had been crossed, and that the bearish trend for the dollar and the bullish trends for commodities had finally come to an end. But rather than representing a sea change, these counter trend moves more likely signify that the established trends are about to kick it into a whole new gear. My take is that if you thought you had seen a bear market in the dollar and bull market in gold, oil, and other commodities, well, "you ain't seen nothing yet".

Corrections are often vicious, designed to shake loose as many investors as possible prior to a major move. The best bull markets carry as little excess baggage as possible. With few speculators on board to sell into every rally, the true believers who remain can receive the full benefit of a fundamental upswing. Violent downward moves also force out those that were too highly leveraged, or those who showed up late to the party with little understanding of the true fundamentals. Those who panicked and jumped out too low often scramble to reestablish positions at higher prices, further fueling the bull market.

This recent correction saw the most dramatic change in sentiment that I have ever witnessed. But the head fake that caused the market to commit was in fact not worthy of a high school benchwarmer. With absolutely no significant developments that could explain either a top in the dollar, or a bottom in commodities, investors placed their faith in price moments alone. Once the numbers started to show some retrograde motion, everyone simply assumed that a real change had taken place, and the momentum buying and selling began. The rapid movement reveals how clueless participants in these trades had become. Even those fund managers that seem to understand the fundamentals were fooled by the sharp price movements and the rhetoric they spawned.

Lacking any real change in fundamentals, such abrupt changes in sentiment following extreme price swings are as bullish a sign as I have ever seen. There is absolutely no basis for a significant dollar rally, or further weakness in gold, oil, or other commodities.

The U.S. is the focal point of the world's financial turmoil. We convinced creditors around the globe into loaning us trillions of dollars. Now that it's becoming increasingly apparent we cannot pay the money back, Wall Street has concocted a scenario where our shell shocked creditors respond by loaning us even more. More alarming is that many brain dead investors see this as a likely development.

The fact is that the outlook for the dollar has never been bleaker and the prospects for gold and other commodities have never been brighter. The rationale for a new dollar bull market, or bear markets in commodities, is just as flawed as those used to justify investments in internet stocks and subprime mortgages. Interestingly enough, it's mostly the same suspects advancing the arguments.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff's book "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to order a copy today.

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Peter Schiff

Author: Peter Schiff

Peter Schiff C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.

Peter Schiff

Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nations leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.

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