US Dollar 'Peso Crisis' UnderwayTreasure Chests Wednesday, November 4th, 2004.
So much to do, with so little time to do it. This is the way we feel at present in regard to attempting coverage of all the bases that deserve a word or two concerning precious metals at present, as things are happening, and change is accelerating. Within our comprehensive and integrated approach attempting to keep you 'ahead of the curve' in this regard, because as you know, we sensed significant change was in the works some time ago, we endeavor to focus on key macro-variables that will likely have growing importance in the future, as after all, in the end this is the true value in our service.
Presently, the most important thing that is happening out there right now to affect your investments in precious metals is the 'dollar crisis' which is unfolding, where important foreign trading partners are beginning to openly criticize US policy, and worse, appear poised to shun unsubstantiated American promises to pay increasingly as time moves forward. In the near-term, things do not look good for the dollar (see Dave Petch's technical review this morning), with the month of December offering the potential for a continued accelerated decline as we head into the new year. (See Figure 1)Figure 1
The fact of the matter is the world is in serious jeopardy of sliding into a severe and prolonged economic slump of undeterminable magnitude, and since the US consumer is the engine of global trade, and in addition to concerns foreigners may have regarding depreciating reserve balances visa vie the dollar, it appears the only way economic activity can be maintained at this point is to allow the greenback to slide, not that outsiders will not begin demanding a higher 'risk premium' at some point soon, forcing the Fed to continue raising rates. In our opinion, it is this understanding, combined with the apparent complacency and lack of concern regarding this situation, that will cause investors to potentially rush into the metals as we move into 2005, especially once growing numbers realize inflation on the consumer level is accelerating, and this time it's not a flash in the pan. (See Figure 2)Figure 2
Source: The Chart Store
Many investors are citing increased risk in the metals at present due to the potential for rising rates, where both yield spreads and real rates could move counter to a favorable climate, let alone nominal market measures could begin rising once again, where occurrences such as this over the past twenty plus years have done much to sponsor meaningful corrections, without a doubt. This time should be different if we are correct about how the cycles are converging however, and from our perspective, where the metals are emitting significant 'buy signals', there appears to be enough pressure in the pipe to send a rocket to Mars, never mind the moon. Lest we forget, just because rates may begin rising on an accelerated basis as well, where precious metals stocks will undoubtedly feel the weight at some point, the cycle is still young and full of fire. (See Figure 3)Figure 3
Source: The Chart Store
Other sophisticated investors appear concerned about new supply coming online, and worse, the appearance precious metals investors are getting 'hoodwinked' by Wall Street yet again, a concern which may in fact have merit, but not simply due to the physical off-take question mentioned in the attached. Without a doubt, the World Gold Council's new Exchange Traded Fund (ETF), StreetTracks Gold Shares (GLD: NYSE), is a resounding success being the most successful 'derivative' ever launched in the history of the New York Stock Exchange (NYSE), breaking all previous first day trading records. Further to this, you may be interested to know that on the subsequent two trading days, which were up days for gold, GLD went on to trade twice the volume of its debut on Thursday, towering over other paper alternatives on the NYSE, both in terms of shares exchanged and dollar values. (See Figure 4)Figure 4
While it's a little early to speculate in terms of lasting effects regarding the increased 'supply issue' as it pertains to GLD, particularly as it applies to large cap alternative paper gold mining company shares, which are seen to lead any moves in the sector, one does have to wonder. In the end, there is little doubt such issuances will not prevent the inevitable, but at the same time, one has to wonder whether such instances will manifest simple delays, or actual opportunity lost. In this respect, and as pointed out by both Dave and myself over the weekend, we were expecting some weakness in precious metals shares this week, with a potential pullback all the way down to the 225 area on the Amex Gold Bugs Index (HUI), a key measure based on our 'progressive interval system', and to be expected with the failure off of 250. (See Figure 5)Figure 5
Much of the above question regarding the 'effect' new supply will have on the market could be answered over the next few days, with the degree of weakness in precious metals shares in the face of buoyant commodity pricing 'proof of the pudding'. Therein, if gold breaks above $450 over the next trading day or two, and large cap gold shares on the NYSE fail to recapture some of their lost appeal experienced since the introduction of GLD, measured not only in terms of price, but by volumes as well, we will have at least a short-term answer to this question. Without a doubt, gold and silver's performance over the next little while will provide invaluable clues as to what we should expect in this regard, where continued buoyancy may render considerations such as the above moot within the full measure of demand / supply forces.
Importantly in this respect, you should know commercial interests had to pay out on a record number of call options written on Comex gold for the December series, where just the ones over the $400 strike price numbered some 55,000. One thing is for sure, and while this is not necessarily a 'short-term buy signal', such an advent, given the history of such instances being so infrequent, is no 'sell signal' either. (See Figure 6)Figure 6
This statement is particularly true as it pertains to gold priced in the South African (SA) Rand, where the chart remains in a bullish posture, just biding it's time while the dollar continues to melt down. (See Figure 7)Figure 7
This has played havoc with several of the SA gold shares over the past few days, presenting us with further opportunity to make good value based purchases, which is exactly what we recommend you do if under-invested in the group. Harmony (HMY: NYSE) should have the Gold Fields (GFI: NYSE) question behind it one way or the other by Friday, where a vote is due, and uncertainty removed. With the 50-day moving average (DMA) riding just under the 200 DMA, and a 'golden cross' likely in the not too distant future, we suggest you not be shy about accumulating at current levels. (See Figure 8)Figure 8
Additionally, Randgold (RANGY: Nasdaq) has been drubbed over the past few days as well, again presenting opportunity, but in the small cap sub-sector. We think current levels represent reasonable value given the 'big picture', where appropriately apportioned additions to your portfolio should benefit your net-worth in the end. (See Figure 9)Figure 9
We would like to continue along this vein in greater detail at this time, but alas find time is running short. As per the above, our view is investors should hold existing positions presently with an intermediate-term perspective, where the goal is to distribute them to the public once some 'real' excitement in the sector is generated, which is not now based on our observations. If you are adding to your portfolios, do so with care and value in mind, as even though prices appear to be high right now, returns over a reasonable time frame should be quite rewarding if our recent currency related 'ratio box' observations prove based in reality regarding peculiarities in metals pricing. (See Figure 10)Figure 10
And in coming full circle as it pertains to the thrust of the message contained here today, one that the US dollar is in the midst of a 'currency crisis' corresponding to the 10th anniversary of Mexico's 'Peso Crisis', a striking irony if there ever was one considering it was lent greenbacks that bailed them out, things could get interesting to say the least in December, where even just a further 5 percent slide could be sufficient to start popping rivets in markets not thought possible just days before. Indeed, it could be that the market is currently in a state of denial over such prospects, and truly shocked by the specter of implications associated with an uncontrolled slide in the world's fiat reserve currency.
This is why we think it's a good idea to 'suffer the slings and arrows of outrageous fortune' if unexpected volatility in your precious metals investments were materialize, because once this state of disbelief is lifted, a fuller reflection of value in your portfolios should be the result, where this is particularly true of the stocks at present. The currency game has done much to hinder performance in particular locales as it pertains to precious metals pricing, an understanding that is growing in reach amongst the investing population, but is still little understood as to how various groups within the complex will outperform and lag within the full measure, and adding much confusion into the formula. Within this regard, short-term timing the various markets could prove expensive at this time, even for the most seasoned traders, as accelerating change leaves the nonbelievers wanting, and having to pay up for ill-conceived notions.
We have never met a truly wealthy trader, but know quite a few successful and sophisticated 'investors' of such stature, individuals who let their profits run at the appropriate times.
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Good investing all.