A Look into 2005
Well here we are at the beginning of 2005. I like to write my yearly forecast essay a few weeks into the New Year, so I can read everything I can get my hands on from all the mainstream financial newspapers and also from some of my most favorite private newsletters. I do this so I can give my readers a large perspective on what the mainstream is saying and also what the real savvy grizzled financial players are saying about what to look for in 2005.
Last year was an interesting year in the financial markets. You had the major U.S. markets down all year until the post election really took the DJIA, S&P500, and the NASDAQ into positive territory to finish the year slightly up. You had gold and silver move higher as well, with silver out performing gold and both outperforming the DJIA. You had the Fed raise rates from 1% to 2.25% for a 125% increase but the yield on the U.S. Ten year bond actually finished the year pretty much the same around the 4.3% level and on Friday Jan 14 the yield on the 10 year was about 4.2%.
The main reason for the yield on the 10 year bonds to remain so low was massive buying from Asian central banks, mostly from china and Japan. Without these two countries supporting the 10 year, the yields would have gone up in a big way. But the real story of 2004 in my opinion was the energy markets. Oh yes you might be saying to yourself, oil hit a high of over $55 a barrel. Yes this is true and some oil stocks did real well but the real story within the energy markets was the explosion in uranium and coal stocks. Up here were I am from in Canada you had simply an amazing year in coal and uranium stocks. Some of these stocks were up over 500% a few even more than 1000%.
While the mainstream financial media was and still is talking about Goggle and Apples IPOD and how goggle shares doubled in price and the big comeback in tech stocks, a few very savvy investors have been making a killing in what I expect to be the big winners in this decade along with gold and silver stocks. The thing to really look for and monitor in 2005 will be uranium and energy stocks and the price of the physical.
The story of Uranium and the world's thirst for more electrical power can be best summed up in Chinas attempt to build many new nuclear reactors to power the countries vast energy demands as hundreds of millions of people buy new cell phones, computers and build massive factories that need lots of electricity to be functional.
Here is a quote from Canada's national newspaper the Globe and Mail in a recent January 2005 article.
"China is growing rapidly and is on the hunt for new natural resources, while Canada, eager to stem a long-term decline in its share of global direct investment, is anxious to attract foreign cash to develop its petroleum and mineral assets. (Ottawa also wants to sell nuclear reactors to electricity-hungry China.)
Officials cautioned the energy co-operation deal is not yet finalized and could be delayed beyond Mr. Martin's China visit, which takes place Jan. 20 to 23.
Sources say the deal could also encourage collaboration on uranium, which Canada sells and China needs to power its growing number of nuclear reactors. It may also cover research on oil sands technology, which Canadian firms use to extract petroleum from tarry deposits in northern Alberta."
So you can clearly see that there is a global build up of nuclear reactors as china and other countries such as India need to use nuclear power plants to feed a hunger for electricity and also stop the massive pollution from fossil fuels as 7 of the most polluted cities in the world are in china! And this is where the investment right now in companies that have large reserves of uranium are so important to investors looking to make a killing in the market.
I have covered the massively positive fundamentals for the uranium market in an essay I wrote back on Sept 30 2004. Please go to my website if you are interested in "The coming uranium boom." So in 2005 and for the better part of this decade I would expect a boom in uranium and a massive explosion in uranium stocks. As one of my most favorite markets analysts Jim Dines is fond of saying "The public is totally blind to the uranium story, this new bull market is completely invisible to the mass public" this means we are very, very early in the uranium bull market. When the public and the people who run hedge funds and mutual funds catch on to the coming uranium boom the price of the uranium stocks will simply explode in price to levels maybe never before seen in the stock market since March 2000.
So going into 2005 I am very bullish on uranium and of course I am bullish on gold and silver. I have written about the positive fundaments of both gold and silver in this decade as I believe the factors that took gold to $850 in 1980 are 100 times better today than then. If this is true it is only a matter of time until the market sees this and takes the price of gold and silver to levels that today may be hard to believe just like in 1990 where you had the NASDAQ at 400 and 10 years later was hitting 5000. Today you have gold at slightly higher than $400 but it would not surprise me to see gold well over several thousand dollars in the next 10 years.
As for gold and silver I believe 2005 will be a great year. The main catalyst that I am looking for to really get this bull market going is a crash in the bond market and a big rise in yields on the 10 year bond (which dictates mortgage rates). One of the big misconceptions in the world is that rising interest rates are bad for gold and silver. Well I don't have to remind most gold investors that in 1980 when gold hit $850 interest rates on the 10 year bond were over 10%. Today you would need a really big crash in the bond market to get to those types of interest rates. Look at the 40 year chart of the 10 Year yield below.
But what would cause this kind of crash in the bond markets? Well the best answer to that question is massive selling of American dollars and then American bonds by Asian central banks (China/Japan). This topic has been covered very extensively of late so I will not really elaborate too much on this highly debated topic. The only thing I will say is that Japan and China along with many other Asian countries have been buying massive amounts of American debt and then dollars to buy that debt.
I really believe that these Asian countries are starting to realize that America has a major fiscal and monetary problem and that it is in there own self interest to diversify there holdings of American debt. The big problem is that these countries have been the only major buyer of dollars so if they start to sell who the heck is going to buy all that debt from them? The answer is no one, and if they do it will be at much lower prices sending interest rates sky high to attract investors.
What will happen to the U.S. economy and stock market if interest rates explode to the upside? Well it won't be pretty I'll tell you that much! Here is the most major problem that a lot of people don't realize. The U.S. government has cut taxes so much over the last few years that they are really just betting that the economy will expand and that people will spend and buy houses (increasing house prices and hence higher property taxes) and cars and that the tax revenue from increased spending will more than offset the massive tax cuts to the public and corporations.
One small problem, what happens if interest rates go up and cause a fall in house prices (decrees in property taxes) and a massive cut back on spending from consumers to corporations (lower consumption taxes) and a huge crash in the stock market (lower capital gains taxes). The tax revenue that the U.S government gets will fall dramatically and in the end they will be forced to raise taxes at a time of economic contraction to pay off there many creditors (China/Japan). There simply will be no other option.
So going forward into 2005 I would watch the bond market very closely to see if there is any breakdown on the 10 year bond chart indicating higher interest rates. Below is a nice Point and Figure chart of the 10 year bond yield, it has a very bullish head and shoulders bottom pattern that is indicating higher interest rates going forward.
And what do I see for the stock market going forward in 2005. Well like I have talked about before in past essays, everyone knows that for the last 100 years every year ending in 5 was an up year for the DJIA some of them very big years of 25%+ returns. To me this really is the only bullish thing that the bull can really hang there hat on. There are simply too many bearish things in the market right now that would indicate a large move to the upside from here. In my opinion along with many other market analysts who have been at this longer than I have been alive, there are just too many things that are eerily similar to the peak in early 2000; you could really classify the 2002 to current rally as a classic echo bubble.
Here are a few examples. From June 1999 to May 2000 the fed raised rates 6 times from 4.75% to 6.5% or 36%. This time in 2004 the fed tightens again raising the fed funds rate five times from 1% to 2.25% or 125% over 6 months.
There had been massive action in the IPO market in 2004; in fact the 21 offerings in the week of Dec 17, 2004 were the most IPO's since August 2000. There were 216 offerings valued at $43 billion making 2004 the biggest year for offerings since 2000. The total is bigger than 2001, 2002, and 2003 combined. This is telling me that speculation is entering into the market in a big way again.
Another thing that is pretty bearish is the level of insiders that are selling stock and bailing out. In August of 2000 insider selling crested with sales of $7.7 Billion, as average investors were buying tech stocks like crazy the insiders of those company's who knew better sold out right at the top. Well here we are again in early 2005 and we start to understand that a few months ago in November 2004 insider selling hit $6 billion, its highest level since August 2000.
All of this is very bearish not to mention the record low VIX and VXN readings that indicate a total lack of fear in the markets. There have been two great essays recently that eloquently indicate where we are currently in the markets and what to expect this year and longer term. I would advise all of my readers to visit Adam Hamilton's web site Zeal.com and read his current essay "No fear in stocks 2" Mr. Hamilton is one of my most favorite financial writers and this essay is very good. The second essay is by another one of my most respected market analysts Robert McHugh he does an amazing job of showing his readers the similarities of today's market moves and those of past market moves in 1972-73 and 1929. The similarities are very scary and very real. You can read his most recent January essays at http://www.technicalindicatorindex.com/.
The last thing that I want to talk about is gold and silver stocks. There has been a lot of talk in the gold camp about the year long correction in the HUI and the XAU. As I will show below in my charts I feel that we are about to break out of that consolidation and really have a great year for gold and silver stocks. One of the first things to say is that 2004 was a huge year for a lot of gold and silver companies. A lot of company's got large financings to help them further develop and explore there current properties. It takes a while for all that extra paper to settle down and get absorbed into the market. But if in 2005 one of the many companies finds a major deposit of either silver or gold it could ignite a fire within the sector as people rush to buy gold and silver stocks hoping to invest in one that could find a massive elephant deposit. This is also true not only to gold and silver companies but really to uranium exploration companies as well. If one of the few Uranium Exploration companies that have been recently financed goes out and finds a major uranium deposit, there stock will explode to the upside raising multiples of the current price.
So seeing a year long consolidation should not worry educated gold investors. In fact we have seen this before! There was a massive sideways consolidation in the HUI and the XAU back in 2002-2003 where the HUI hit 147 in early 2002 and did not get above that level until a full year later when it finally broke the 150 level on its way to 254 by late 2003. As you can see below the exact same patter has been forming for the last year just on a bigger scale (fractal basis). So this pattern should break to the upside and provide huge gains in the HUI this year.
The second chart below is nice 3 year point and figure chart of the HUI. You can see a very clear Elliott wave pattern here where the 4th wave is the head of a massive year long Head and Shoulders reversal pattern with is super bullish! I have put a multi year point and figure chart of oil below the HUI chart to show the bullish aspects of head and shoulders reversal patterns. Do you see the way the patterns in both charts are very similar. Look how they are formed and the outcome of the price moves within the patterns. 2005 looks to be a very good year if you are long stocks related to the HUI and the XAU.
Finally I will show 2 charts of gold the first one is a 3 year chart and the second is my favorite 30+year gold chart that I always show to keep people's perspective on the gold market. Please remember everybody; this is a long term secular bull in gold here. Gold is not going to $1000 next week or even next year but it will go over $1000 by the end of this decade. So if you have any sort of patience and foresight minor market moves will not deter you from the ultimate outcome and that is a massive wealth transfer to the few savvy people that took the action in the early part of the 21st century and bought gold, silver and uranium stocks when no one else wanted them or even knew about them.
2005 Bullish for Gold, Silver, Uranium, Oil, Coal.
2005 Bearish for Bonds, DJIA, S&P 500, NASDAQ.