Climbing The Wall Of Worry
The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, Nov 11th, 2009.
The news could not be worse considering the economy is constantly touted to be recovering by a price / expectation managing bureaucracy and sympathetic media. From bursting bailouts to bulging budget deficits to growing needs to crashing consumer credit - observers are subjected to a constant flow of bad news. And while this is having little effect on price focused small speculators, as mentioned on Monday in our options analysis, it has caused the pros an more educated large investors to at least hedge long positions, which has been bringing put / call ratios up. Of course the net effect of this is for stocks to remain stubbornly resilient, as has been the case, climbing the proverbial 'wall of worry'.
And this has also had the effect of sponsoring a controlled fall in the dollar ($) that appears poised to continue. Again, many are talking about the 'dangerous $ carry trade', which is causing increasing numbers to bet against its continuation. As mentioned Monday as well, this will likely prove expensive in coming months however, as less endowed hedge fund managers are compelled to buy precious metals (and other $ carry trade sensitive securities) no matter what the price for year-end window dressing.
So, no matter what happens in the short-term due to factors like options expirations, which in the case of the December Comex Gold contract is on November 23rd, prices should finish the year strong, also likely carrying through into the quarter next year, if not longer. In terms of the decennial mania that gripped tech stocks in 1999 / 2000, the sequence went to March, however most bull markets last 16 to 18 years, leaving another 6 to 8 years for precious metals to run. Just think about it; official and retail accumulation of physical has not even begun yet, and supply is already restricted. Thus, as increasing numbers of central banks and individuals are compelled to buy, gold will go parabolic. (See Figure 1)
Gold is up strong overnight, however the basic count depicted above is likely not too far off, so don't be surprised if a short-term top is established soon. If you are looking for an accumulation point, options expiry on November 23rd may be your best opportunity, with anything approaching $1050 again to be considered a gift. (Note: This view has been far too conservative, with all pullbacks shallow since.) After this little correction, the decline in the $ may not be so orderly, with investors looking to buy just about anything instead of holding $'s. I was listening to a gentleman on CNBC yesterday say the US government will be broke in year and a half, and he figured that's why the stock market should go down. What he fails to realize of course is first central authorities will attempt to counter this with inflation of varying degrees, perhaps even hyperinflation. (See Figure 2)
Again, this is why instead of prices going down like the fellow above thinks, prices of just about everything head higher, with even despised precious metals shares on this list. This means the RSI test indicated above should prove successful, with precious metals shares outperforming the metals moving forward, much to the surprise of wrongheaded bears. And again, as mentioned Monday, this also applies to the broad measures of stocks, with the chart below of the monthly NASDAQ / Dow Ratio providing confirmation of this view technically. Here again we have an RSI test under way that should prove successful, potentially sending prices back into extreme 'bubble territory' once more to some extent. (See Figure 3)
Unbelievable? That's exactly why it can happen in our faulty and fraudulent markets that are based more on gambling practices of participants rather than fundamentals. And largely, that's what the options / futures markets guarantee - that being distorted pricing often at odds with the fundamentals. Bottom line then, what is being suggested above is we are on the cusp of a manic sequence in precious metals that will extend to its shares, along with other $ carry trade sensitive securities. (i.e. basically all things equity.)
Use any pullbacks to increase your participation if not at optimal levels consistent with your risk tolerances and objectives.
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Good investing all.