What If the U.S. Dollar Crashes Overnight?

By: Przemyslaw Radomski, CFA | Wed, Jun 16, 2010
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This essay is based on the Premium Update posted on June 11th, 2010.

One of the questions that we've received last week was about the possible non-confirmation between gold at new highs and both silver and stocks lagging well beneath their old highs. The question is if such a non-confirmation becomes a source of worry at some point, since these three sectors traditionally move together.

The answer is the one that every economist likes to give when being asked just about any question - it depends. In the long run fundamentals drive prices of assets and the precious metal market is not an exception from this rule. As long as fundamentals are in place, the bull market in the precious metals will continue. There are several signs (as featured in the "Top or Not?" list in the Tools section on our website) that will tell us that this is indeed the ultimate top - we don't see them yet.

The declining general stock market may continue to put a negative pressure for mining stocks and (especially) silver until we get to the final stage of the bull market (actually, we expect high rates of return even from stocks that don't mine gold nor silver, but that are just named "golden something" or "silver something".) In case of silver, we might also see sharply higher values in case of a problem with delivery of silver on COMEX. However, until either of them takes place, we might continue too see underperformance of these two parts of the precious metals market if the world stock indices move lower.

In case of silver, we don't think it would invalidate its final rally or make it anything less than breathtaking, but it could certainly delay it. In a way, lower values of the main stock indices are good for long term silver investors, because they would allow to buy as much silver as possible at relatively low prices before the silver market takes off.

As for the mining stocks, the situation is quite different, as they are not that likely to outperform metals during the final stage of the rally. However, in case of gold and silver stocks, the history suggests that the positive correlation with the general stock market is likely to wear off sooner or later. Please note that from 2001 to 2003 gold stocks managed not only to rise, but also to outperform gold along with declining stock market.

Therefore, the disproportion between gold's performance and the one of silver and mining stocks does not change the fundamental situation for the whole precious metals market, and consequently, does not make us concerned, as there is a good explanation behind it in the form of declining stock market.

There's one more thing that we would like to comment on in this essay, as we've been also asked about the final stage of the rally, and what would be the use of the having massive gains on one's mining stocks, if they would be priced in the U.S. Dollar that could be worthless at that time. That is true that the final stage of the bull market in the precious metals market could correspond to a financial instability to say politely, but fortunately we are in this market to maximize our chances of even increasing our wealth during these difficult times.

Let's split the above question into two separate matters. The first one is "how do I know that I won't lose everything I have if the U.S. Dollar collapses overnight" and the second one would be about the gains in mining stocks when the U.S. Dollar is worthless.

The first question is all about owning physical metals. If you own physical metals, keep them in a safe place, or even better it is spread among several "safe places", it seems that you could sleep well at night. If the USD collapsed overnight, the increase in the value of the precious metals holdings would be so massive that just a 10% in gold/silver should more than make up for the losses in your "paper wealth." So, by following the rules listed in the Key Principles section you would have about 20%-25% of your portfolio in physical metals and an overnight dollar collapse could in fact massively increase your wealth. Therefore, you're protected at all times.

The second question is about protecting one's profits in mining stocks or from other speculative vehicles. Generally, it does not need to overly concern you either, because - as mentioned above - mining stocks are not likely to outperform metals during the final stage of the bull market. Therefore, we will strive to detect when it is not likely that mining stocks' outperformance will not return soon, and we will suggest switching directly to metals, just like we are now suggesting owning gold instead of silver and mining stocks (of course this is because of the short-term uncertainty regarding the last two markets, not because we believe that the bull market is close to being over.)

This is not recommended for most Investors, because could decrease one's profitability, but if you are particularly afraid that you could lose your speculative capital because of the death of the U.S. Dollar, you might want to put 10-90% of your profits from each trade (depend on how afraid you are) in mining stocks directly to physical gold or silver. In this way you will be sure that the relative amount of physical metals in your possession is constantly rising, and at the same time the amount of "paper wealth" at risk (here: stocks) decreases. Again, the price here is limiting your exposure to profits from speculation on mining stocks, so it's a trade-off.

Summing up, the long-term direction in which the precious metals is likely to go is still up, and if you prepare yourself accordingly, you should be able to preserve your wealth, and probably even increase it, even if the current financial system would cease to exist in the current form. Meanwhile it might be a good idea to earn money along the way by trading gold, silver and mining stocks.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski, CFA

Author: Przemyslaw Radomski, CFA

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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