'Snow-Job' Won't Fool Gold
by Rick Ackerman
Monday’s forecasts straddled the fence in a manner that may not have been entirely helpful to some of you. All last week, activity related to the expiration of May options advertised the stock market’s weakness. Floor pros who were in a position to manipulate stocks with cheap, expiring puts and calls stayed relatively docile, seemingly lacking the confidence to effect short-squeeze rallies in numerous stocks that had appeared primed to fly. Friday’s turgid action reinforced this impression, and the tone of Monday’s Black Box was properly bearish to reflect it.
So why were nearly all of the specific price targets for Monday higher rather than lower? Simply because long-standing upside targets had not yet been reached. I gave the bull the benefit of the doubt as the week began because the upside target for one bellwether in particular, IBM, was just inches above last week’s high and therefore a decent bet to be achieved. As longtime subscribers will already know, the breach of a hidden pivot usually indicates that the underlying trend will continue until the next pivot is reached. But interpreting this dynamic can be subjective, at times hinging on how decisively a pivot has been penetrated. In retrospect, the minor rally cycle has shown little gumption relative to the upside targets we’ve been using.
Dollar Safety Net Gone
Now, unless stocks come roaring back within the next few days to meet those targets, my outlook for the next month or so will turn bearish. My earlier bullishness on stocks for the intermediate term was based in part on the assumption that the dollar index would find major support in the range 92.50 – 95.00. Odds still favor a bounce from within that range, since many months’ worth of consolidation/distribution have occurred there in the past. But it may be a feebler bounce than we’d initially expected, given the extremely negative press the dollar has been getting following a watershed speech over the weekend by Treasury Secretary Snow. Snow allowed that the U.S. is ready to abandon its verbal support for the dollar – to abandon, even, the pretense of supporting it.
The administration has spun this decision in a peculiar – make that, dumbfoundingly stupid -- way by suggesting that the dollar’s true strength is not reflected by its market value, but by the “confidence” which it inspires in the public. Oh, and also by its resistance to counterfeiting. Got that? The big question now is, does the administration truly believe that cheapening the dollar will help cure our trade deficit? For if competitive devaluations are really just a game of beggar-thy-neighbor, then we are a tad late in our attempts to undermine the exports of Germany, Japan, Canada and some of our other major trading partners. The respective economies of each country are teetering on their own -- most significantly Germany’s, whose deflationary tendencies could reach critical mass even before America’s. Another factor which will moot the trade-balance effect of a cheaper dollar is that China has pegged its currency to the dollar. In manufacturing, China is the global deflator, the 800-pound gorilla of exports, and unless it allows the yuan to float higher against the dollar – don’t hold your breath on that one – chances are slim of a significant pickup in U.S. exports or a big decline in the trade deficit.
Why Let the Dollar Fall?
Our guess is that Snow and his cohorts at the Federal Reserve understand that devaluing the dollar will not much stimulate U.S. exports in a global recession. So why are they permitting the dollar to fall? The answer is that they aren’t -- that they know the dollar is headed for a potentially catastrophic decline regardless of whether or not it is official policy. So, with their facile pronouncements, Treasury Secretary Snow et al. would have us believe that a weaker dollar is the economic outcome the U.S. desires. That kind of Snow-job may fly on CNBC, but nowhere else – most especially among foreigners who still hold huge dollar reserves in the form of U.S. Treasury paper and other dollar-denominated securities.
All of which leads us -- yet again -- to the inescapable conclusion that gold’s day in the sunshine is not too far off. We had expected bullion prices to take their good old time getting off the runway following the recent correction from $390 to $320. But this assessment may have been short-sighted and parochial to the extent it focused mainly on domestic factors of supply and demand. The theory was that so many gold-lovers got caught long at the $390 top that they would have little buying power to accumulate more of the stuff as prices collapsed. We further reasoned that lifting gold thereafter from the mire at $320 would require an infusion of capital from newly bullish investors who up to that point had skeptically avoided gold.
“Gold Dot-Com”?
We now think that much larger, bullish forces are at work, and that foreign capital that until now has flowed from dollars into euros will start to move less reluctantly toward gold assets in the coming months. That flow is almost certain to become a torrent at some point, although it’s anybody’s guess exactly when. In the meantime, the shift into euros as a dollar alternative may already have been dangerously overdone, since the D-mark surrogate is intrinsically, fundamentally and ultimately the same worthless air ball as the dollar. Moreover, to the extent a country’s economic prospects are a factor in determining the present and future value of its currency, demographic trends say the euro may be in even worse shape than the dollar once the global credit bust has run its course. For while the U.S. economy could conceivably make a fresh start, the welfarist eurostate would be bucking intractable problems of structural unemployment and non-competitiveness that could restrain growth for decades.
As such, the still-strong euro should be considered no more than a stop-gap investment – the place where the world has chosen to park its investable cash until the money can be re-directed into a far less liquid but ultimately more promising gold market. An analogy would be the homeowner who, fearful of a deflationary bust, sells his house and puts the money in T-bills or money market funds. Sooner or later, however, much of the world’s safety-seeking money is going to find its way into gold. At that point, as we have asserted here before, it will not matter in the least which gold stocks to own, for even the sorriest of them will soar like the high-falutin’ dregs of the late, great dot-com era. It could be argued that gold’s ascent will be even more spectacular than that of the dot-coms, since there was effectively no limit to the number of fly-by-night Internet companies that could be created to satisfy investor demand. The world’s supply of mining shares, on the other hand, is not only finite, it is smaller in dollar value than the shares of just one dot-com stock, Cisco Systems, during the communications hardware firm’s heyday.
Classical Fooler
Meanwhile, the nascent bull market in gold is looking more and more like a textbook classic, since it is managing to fool bulls and bears alike – to fool us, at least, since we thought we’d have all the time in the world to pick up mining shares when the POG was touching bottom near $320 not long ago. Instead, bullion quotes crept quietly higher over the last six weeks, leaving those who were indecisive at $320 to wish they’d had more confidence. Now the opportunity to scoop up such bargains is gone, and the short-squeeze that will propel an ounce of gold past $400 is still yet to come. Next time gold’s price dips, we’ll know better – that rock-bottom prices will last only for a few days, if that long. |
