Date: Thu Apr 07 2005 15:21
trotsky (James@ECRI) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
i think their streak could well end, for the simply reason that the economy has a STRUCTURAL problem ( namely overconsumption based on two large bubbles in succession ) that is not being adequately reflected in what are after all only very traditional cyclical forecasts. the trick is to figure out WHEN the structural problem leads to a cyclical downturn, and the sudden appearance of 'surprisingly weak' data all over the show could well be the signal. admittedly it's not a certaintly, but i'm always trying to anticipate.
regarding the dollar, i doubt that economic performance has much to do with currency correlations. in floating fiat money systems, it is only important 1. who prints more money and 2. if there are large interest rate differentials. everything else is secondary, and economic growth is way down the list of important factors ( allegedly the US economy has outperformed both Europe's and Japan's for the past 3 years, but the dollar has plunged anyway ) .
so economic weakness per se says nothing about what the dollar might do. it's due a bounce, and i've said so on several occasions. consequently the PoG could well remain in a trading range. but if the yield curve steepens, the gold stocks will rise anyway. for instance, they rose from 1960 to 1968 almost uninterrupted, in spite of the fact that the PoG stayed fixed throughout the period. a steepening yield curve is the signal for them to discount FUTURE advances in the PoG.
Date: Thu Apr 07 2005 15:06
trotsky (frustrated, 14:19) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
the 'asset' that backs the ABS securities issued by Ford Motor are NOT the cars that have been sold, but the loans that have been made to make the sales possible. so the depreciation of the value of the cars is only important inasmuch as it means the ultimate borrowers are underwater in terms of 'equity' as soon as they leave the showroom with their purchase. for the buyers of the ABS it's different: they have a claim on the loans themselves, and an income stream derived from those loans, plus they usually have a 'guarantee' underwritten by one of the guarantor companies like MBIA, or even one of the big banks ( often the bank arranging the deal also guarantees it, which allows for the issuer to get a much better credit rating than would otherwise be applicable ) .
this is modern credit bubble magic: you get to buy AA or better rated paper that is backed by loans that per se are probably junk at best.
Date: Thu Apr 07 2005 14:58
trotsky (Goose) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
if my theory about what is driving gold prices is incorrect, how would you then explain that the biggest historical rallies in both gold and gold stocks have occurred in and around recessions?
e.g. the frequency and depth of the recessions in the 70's and early 80's was extraordinary, and as we all know, this was the time when gold and gold stocks had their biggest rallies ever. the recent rally has also been kicked off by a recession ( in fact, the rally in gold and gold stocks began right AT the 'official' beginning of the 2001/2 recession ) .
even during the great depression of the 1930's ( when money was truly scarce ) , gold stocks were the only sector of the market that rallied. between 1929 and 1935, when both the stock market and the economy suffered one of their biggest and most enduring collapses ever, Homestake Mining provided a return of nearly 1000% ( including dividends ) to its holders. and mind you, in the early 30's even treasury bonds crashed on account of solvency problems forcing liquidation, but gold mining stocks soared anyway.
so the historical record supports my contentions very well.
Date: Thu Apr 07 2005 14:48
trotsky (Erle, 13:57) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
as it were, both the UK and the Australian economies are leading the rest of the world cycle-wise. they are about 6 months to a year ahead of the US economy for instance, in terms of their interest rate cycle. the fact that their yield curves have inverted ( this happened some time ago already actually, and in the meantime, the shape of their curves has begun to pull away in the other direction ) is a guarantee that both economies will enter a recession ( the yield curve inversion is the only historically 100% accurate predictor of future recessions ) fairly soon.
but these economies do not only lead in the interest rate cycle, but in the entire business cycle. thus we can expect a global synchronized recession to begin with a slight lag. you will probably be astonished to find how fast steel prices can fall when that happens. inventories that have been hoarded to thwart the current artificial shortage will pour forth all over the globe. people tend to think that when the warehouses at the metal exchanges are empty it means that there are no inventories ( see Ted Butler and silver for an example... ) . but this is generally not true. during commodity bull markets, every commodity user plus the speculators hoard as much as they can out of fear of the materials in question becoming unavailable. usually the hoarding keeps up until the very price tops are reached ( see Ford's disastrous buying of 200,000 oz. of palladium in the very week that metal reached its all time high. they paid $500 oz. MORE than the metal was trading for at the NYMEX, basis front month, i.e. they paid $1,600/oz. ) .
of course it is NOT reasonable to expect a price crash back to the lows of the late 90's...this is highly unlikely for structural reasons, since even in a global recession scenario residual demand growth from the newly industrializing countries like China and India will continue to support prices to some extent.
but the recent blow-off spikes in many commodities are a typical late cycle phenomenon...they indicate as well that a turning point is near.
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