good piece, although I hope he's wrong about it taking a month for the gold stocks to recover.
prudentbear.com
Guest Commentary, by Chris Temple
Gold, stocks and '70s Lite
January 18, 2004
Chris Temple is editor of The National Investor newsletter and founder of The Foundation for American Renewal.
At long last, we’ve recently heard cries of “Uncle” from some quarters where the U.S. dollar’s relentless decline—and the corresponding increase in other currencies—is concerned. As a result, there have been some significant market developments over the last several days. They are not ones likely to change the many longer-term trends that have become evident over the last year or two. However, these changes have been affecting many investors, especially those who were unprepared for them.
On the currency front, the highest-profile grumbling has been coming from the European Central Bank, whose currency has been the most prominent gainer among the major ones versus the greenback. On Monday, the dollar’s decline against Europe’s common currency reached new lows of over $1.29 per euro. Then, new E.C.B. President Jean-Claude Trichet publicly expressed concern for the first time over the “brutal” rise in the euro’s value, one which has hurt exports from the eurozone and threatened its fragile recovery.
As a result, we’re finally seeing an overdue correction in the euro’s ascent, together with a commensurate respite for the dollar, now that at least someone in such a position has decided to fire a shot across currency traders’ bows. Today, we’ve dropped back to just below $1.26 per euro. What’s been interesting about the currency markets, though, is that the dollar has NOT enjoyed similar rebounds against most other currencies. Against the yen, in fact, it has hit another new low this week below 106 yen before bouncing; and this in spite of yet more Bank of Japan intervention.
The dollar-versus-euro move is far from evidence of any renewed confidence in the U.S. currency. In fact, that the dollar has not rallied much yet against other currencies is evidence that traders still have no love for America’s scrip. However, part of the Federal Reserve’s present plan—which I’ll be exploring in The National Investor in the not-too-distant future—is to actually lead the world in “competitively devaluing” its currencies. Greenspan and Company know that they can’t be the only ones keeping interest rates at puny levels, and are trying to force other countries now to actually cut interest rates further, so as to have the best hopes of keeping the global economy grinding ahead. Few fully grasp, in fact, that the big worldwide trend in prices is in transition; it’s moving from one dominated by China’s purported exporting of deflation, to one where America will seek to export inflation.
South Africa, New Zealand and Canada may be on the verge of cutting rates, both to take some of the steam out of their own currencies’ moves against the U.S. dollar. England, which would like to be raising rates further, is now stuck with having to deal with sterling’s 10-year high against the dollar. Ditto Australia. All this will make for an interesting meeting of the G-7, coming up in Florida next month.
The most significant fallout from the dollar’s nascent recovery has been felt by metals and mining stocks. With hedge funds who were heavily long the market now having an excuse to sell thanks to an interruption in the dollar’s bear market, gold is getting hammered. Moments ago it closed at $408.30 in New York, down $13.10 on the day.
Gold mining stocks are getting hit as hard as they have since the sector reached its intermediate-term peak around December 1. The Amex Gold Bugs Index, or “HUI,” is now down 17% from that peak near 260, losing around 13 points on the day as of around 1:00 p.m. Eastern time.
Though I’d give gold itself a 50-50 chance right now of holding above $400 per ounce, the misery for the gold shares is not yet over. Having decisively smashed now below the previously reliable support of their 50-day moving averages, gold shares will suffer additional losses for two reasons. First, institutions and individual investors alike who rode this momentum play over the last several months will now be spooked by gold shares’ technical breakdown, and will add further to the selling.
Secondly, I still feel that most are unprepared to hear just how badly the bottom lines of many of the world’s medium and large-sized mining companies were hit last year—and especially in the fourth quarter—by the weak U.S. dollar. Over the next month we’ll be hearing from them all, and finding out anew that for too many, gold’s dollar-measured rise in price during 2003 didn’t translate into any better financial health for them. If I’m right, those gold companies most negatively impacted may suffer disproportionately, feeding the correction in the sector even further.
Eventually, however, this latest nasty comeuppance for gold bulls who got too cocky and careless will be over. And, I don’t think the process will take nearly as long as it did following the long correction after the June, 2002 peak in the sector; in fact, it might well be over in a month. When it is, those willing and able to invest will feel like kids in a candy store with a pocket full of money. Sadly, though, most will instead “enjoy” the next leg up in gold shares by counting the days/weeks/months it will take just to get back to where they were before.
While most other commodities and commodity-linked shares have joined in gold’s woes to one extent or another, crude oil prices have remained conspicuous by bucking this trend. Though it backed off some today, crude still just hit yet another post-Iraq invasion high over $35 per barrel. So strong has oil been, in fact, that prices have stubbornly moved higher in spite of apparent OPEC over production recently. Now, even the oil cartel is crying “Uncle” due, in part, to what the weak dollar policy has done to its “currency.” Not helping is the fact that U.S. crude oil stocks are at their lowest levels since 1975, due in part to a Bush Administration that has utterly failed in addressing America’s long-term energy deficit except (it thinks) through its risky “energy policy by conquest” strategy.
There are two dangers. The most immediate (and selfish) for OPEC members is that these high prices will not allow for the planned cuts in production slated for next month, which would likely push them higher still. Second, the chronically high price—even if it is measured in the cheapened dollar—strongly risks setting back economic activity, as well as hitting corporate profits. The latter, of course, will lead to the former if unchecked.
Wall Street is largely oblivious to this, not to mention many other things it should have a sharper eye on. Instead, stocks generally continue grinding higher. Yet, one gets the unmistakable sense that stocks wanting to continue sprinting higher have balls and chains around their ankles, which are suddenly starting to feel a bit heavier. The jobs numbers continue to be disappointing. The Christmas shopping season—even when one adds the delayed reaction from all the gift cards which have now been spent—was sub-par.
Corporate earnings season has commenced, but without the universal success (and then some) already priced into the market. Intel met its earnings expectations, but warned that both expected revenues and its capital spending budget for the first quarter will be less than expected. Apple and Yahoo disappointed, with both of those stocks starting the day weaker. To be fair, numbers from I.B.M. looked good; though its bottom line was helped more by the dollar’s weakness than by any big increase in top-line growth.
To me, the most interesting report so far, though, has come from aluminum giant Alcoa which, as it always does, kicked off the quarterly earnings releases last week. Once one waded through the myriad charges, one-time gains and the like, the starkest thing was the way in which rising expenses, MOST NOTABLY ENERGY, had hurt the company’s bottom line. We’ll hear from others like this in the weeks ahead.
In my view, we’re on the way toward what I recently dubbed a “70’s-lite” type of environment. The dollar will weaken further. Costs, led by commodities, will rise. Eventually, there will be upward pressure on long-term interest rates, in spite of the Federal Reserve’s gallant (but ultimately doomed) efforts to hold it off. None of these trends, mind you, is likely to be as extreme as those of the late 1970’s; at least not any time soon. However, the pattern will be the same; and Americans will re-learn the word “stagflation.”
For now, though, stock investors continue to be fixated on what have been or are perceived to be the “benefits” of the reckless fiscal stimulus and dollar debauching that has occurred in the last year. They still could not care less about what consequences that has sown for the future. As Scarlett O’Hara would say, “I’ll worry about that tomorrow.” |
