The boards have been awash in a sea of red for precious metal investors. After Operation Twist many forget the underlying reasons why the U.S. dollar (UUP) is rallying. A few weeks ago we highlighted that Japan(FXY) and Switzerland(FXF) fired a shot heard around the world in an attempt to remain competitive in the global marketplace. The rapid rise of the yen, a traditional safe haven currency, threatens Japan’s economic survival in an increasingly competitive world arena. This holds true for the Swiss as well.
The franc and the yen were seen as safe havens compared to the U.S. Dollar. This interventional action into the foreign exchange markets is the third time this year that Japan has had to resort to drastic measures of buying U.S. dollars in order to devalue the yen. The Swiss, Japanese and U.S. surprise has sent the dollar soaring. There appears to be a coordinated effort to boost up the dollar. This is good for the struggling European problems as the indebted PIIGS can pay off their soaring debts with cheap Euros (FXE). Finally, a dollar counter-trend rally has occurred.
The world markets sensing international monetary fear, regards Japan and Switzerland’s move as a shot across the bow. As the world reacts to the action by the Federal Reserve’s Operation Twist, there is danger of other nations creating a full blown global currency war. Eventually the good old U.S.A. seeing the dollar rise will be forced to devalue its own currency as a rising dollar makes it difficult for the U.S. to pay back its soaring debts.
Will the Fed or European Central Bankers through a Euro TARP come riding to the rescue in time to avert further bloodshed? Bernanke has the option of doing what he did heretofore, which is to print fiat money. The hoped for result in the Fed action, reflects the ongoing thesis of Gold Stock Trades, that a resort to additional global quantitative easing in whatever guise will be a welcomed relief from the pain that investors are undergoing.
Operation Twist has gotten the market to ask, “May we have some more QE...please?” This is why we have heard talk of further QE’s down the road. Are we being programmed for further accommodative actions as investors flee to the supposed safe haven of the U.S. dollar and long term debt?
Obviously the world is reacting with a loud, “No!” to Bernanke and Obama’s inept ability to jumpstart a struggling economy sending the U.S. dollar and treasuries(TLT) skyrocketing and selling equities (SPY), gold (GLD), silver (SLV) and copper (JJC). The U.S. Dollar and treasuries are in overbought territory indicating that the risk aversion panic may be reaching a peak, while commodities are reaching record oversold levels and has provided a discount sale for investors who have not yet entered the hard assets secular uptrend.
Now the Fed and the ECB will be forced to come riding to the rescue before the whole system deteriorates any further. Nation after nation are entering the currency battles. Is the U.S. biding its time until Europe contains its own debt crisis?
What does this all mean for GST subscribers as the global hemorrhaging continues unrelieved dragging down our mining equities and gold and silver bullion to fire-sale prices? Do not be dismayed as we firmly believe that precious metals remain a central core holding and that the miners will catch up after the margin calls are met. Investors are selling the good stocks with real assets, to cover the losses in their weak stocks.
It is realized that the mining equity battlefield is covered with stocks (GDX and SIL) that are technically damaged. However, this is not the time to flee the battle when the smell of gunpowder is in the air! This is the time to be patient, remember the underlying fundamentals and look for compelling values.
We are adamant in the signal that the marketplace is sending us. There has been a disproportionate ratio of down stocks to up stocks. Usually a ratio of 10 to 1 indicates an immediate turnaround. At this point the disproportion may be setting a record. Unless this action is forecasting dire catastrophic events, there are no places to hide.
At this point the marketplace will accept even palliative measures as long as the downward descent is halted. We expect Bernanke and Trichet to come up with more powerful measures. It may not walk like QE3, or talk like QE3 but in the very least it will act like QE3 by whatever means necessary unlike the twist.
Make no mistake, what is happening today in the general market has resulted in an extremely oversold condition in mining stocks(GDX) and gold and silver bullion. A strong rebound rally is anticipated in these areas.
One of my readers just wrote, “Jeb, is the world coming to an end?” These words are music to my ears as they indicate the fear from which significant rallies occur in precious metals. Stay tuned to the rally that inevitably arises from such pessimism in my daily bulletin.
Disclosure: Long GLD,SLV, GDX
Check out my recent interview discussing the selloff in gold and silver.