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These past few weeks, as the equity markets rallied based on the belief of further quantitative easing by the Fed in November’s meeting, the dollar has collapsed, which I warned readers about a couple of weeks ago. Since that time, gold and silver have had a historic and parabolic rise as investors feel the Fed will continue to ease through the end of the year. Investor sentiment has reversed completely over the last eight to 12 weeks, since I signaled a buy on gold. There are no concerns as bullish sentiment on equities and precious metals reaches record levels. Investors feel the Fed will solve everyone’s problem by devaluing the US dollar. The temporary Band-Aid isn’t fixing any of the core problems. Unemployment is still high and housing is weak. Neither the financials nor the homebuilders are participating in this rally, which leads me to suspect this entire rise in the markets isn’t sustainable as it’s been on low volume and key sectors haven’t yet participated.
In countries where there’s a huge deficit, the only solution to pay back debts is through a devalued currency. Japan has recently intervened to try to devalue the strengthening yen. A strengthening currency to countries with huge obligations can heighten the risk of default, which many countries are facing. Also, a strong currency puts pressure on international corporations that export products abroad. A weak dollar will cause the products to be more expensive to American consumers, hurting demand and growth. More sovereign debt defaults in emerging markets are expected. It appears that many investors ran to the dollar from the euro after the European Debt Crisis. I expect something similar to occur now. The euro is reaching a key resistance level and is overbought. This means a pullback should occur. The US Dollar is extremely oversold and at long-term support. The bearish sentiment on the US dollar is extremely bearish, which indicates a reversal should occur.
As global economies feel the consequences of the United States’ actions, I expect further fallout from weak economic growth and the sovereign debt burdens in Europe. Many investors are pricing in a major move from the Fed. I’m not so convinced, as equity markets are higher and the dollar has moved significantly lower. Investors should realize that unless we see another sovereign debt issue or another bank failure, another major round of easing is unlikely at this point. I believe the investment community is expecting too much from the Fed and it appears the Fed is doing an excellent job stimulating the markets just through speculation of a move rather than the actual move itself.
This last easing from the Fed has met with some more critics and it has definitely increased international tensions. The US dollar has collapsed and is now testing long-term support. I don’t know at this point if the Fed will be so quick to act the next time around unless there’s another deflationary crisis.
Technically the dollar is due for a bounce and investors should look for any pullbacks in gold and silver as a buy point. Instead of the risk associated with buying bullion at these extended prices, many juniors that would be extremely profitable at lower gold and silver prices haven’t broken out yet.
I believe these junior mining companies are presenting a great buying opportunity. Remember on these recent parabolic moves, the faster it goes up, the faster and harder the correction. Last Thursday showed a huge volume reversal day. This indicates to me that some of the smart money are hedging their long gold and silver bullion positions for a correction. Although we may see further upside, the move is about to get exhausted as it has taken out many technical targets and measured moves. Be careful of getting caught up in the hysteria.
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Gold Breaking Out Vs. Euro, Relative Strength Chart Shows Trend Change
In Market Analysis on August 12, 2010 at 3:04 amThe trade deficit widened unexpectedly this month after the dollar reached extremely oversold levels, which was quite surprising to Wall Street. Usually, a weaker dollar should lead to an increase of exports of U.S. goods; however, the exact opposite occurred. This further signifies the global economic slow down despite record government stimulus, a devalued dollar and artificially induced low interest rates. The market and the employment situation are no better off now than they were previously.
Despite Washington’s attempts to prevent a depression through spending, investors are beginning to lose hope in what the Fed and Congress are doing to prevent a collapse of the markets into new lows. Yesterday, as predicted, the House created a $26 billion job bill that will supposedly prevent government layoffs and expand the job market for government workers. Washington is trying to alleviate high unemployment by creating more government jobs. That is not real job creation. Incidentally, the previous employment numbers were mildly inflated due to the recent influx of temporary Census workers and did not accurately reflect the true numbers of unemployed Americans.
Investors believe that sustainable job creation is through small business growth. The markets, as well as the American people are looking for leaders who will cut government spending and institute tax cuts for small business owners. Entrepreneurs who are trying to innovate and meet consumers’ demands in a struggling economy should be supported with meaningful tax breaks. This spurs authentic growth and innovation. I expect the market and the American People to vote in candidates who are committed to these principles. The people are losing their faith in the current leadership, as evidenced by President Obama’s approval ratings dropping to their lowest point in his entire tenure.
The Fed has committed to buying long term treasuries, which would artificially keep interest rates low. They are desperate to get capital flowing again, but it comes at a cost. Eventually, markets move back to their former equilibrium and long term trends. If you push down a spring as far as it goes, it eventually snaps back harder than before and reverberates. We may not see it for a while, but eventually long term treasuries will crash. Right now investors are flocking to treasuries for security and safety. However, just as the market is losing faith in the Fed’s handle on the economic situation, bond holders will ultimately lose faith in government bonds. We may see a drop in treasury prices along with continued high interest rates over the next several years and possibly even decades as our children and grandchildren face the burden of credit downgrades.
My fear of a devalued currency and lack of confidence in Obama’s handling of the economic situation are the reasons I am bullish on specific mining exploration stocks that are converting their strong cash positions into high grade copper, silver and gold resources. I have been following this sector for over nine years. I gather that during the next five to ten years, precious metals will see a lot of growth as investors seek hard money and hard assets.
Today’s major collapse in the equity market was significant. Last week, I mentioned that the dollar was extremely oversold and that the Euro and U.S. equities were about to correct considerably. Today we are seeing the beginning of a new downwards trend in global equities and a flight to safety. Investors are worried that efforts from Washington will do nothing to prevent a slowing economy and a huge trade deficit.
Yesterday’s weakness in gold was only relative to the dollar and U.S. treasuries. Compared with the Euro, there are technical signs of a major move upward in the price of gold. We could see a resumption of the market patterns that we saw in April and May when gold and the dollar rallied together as investors were seeking shelter from government defaults and sovereign debt crises. The relative strength trend of gold versus the Euro is an important indicator of the true price action of gold. Right now, it is showing signs of a bullish move higher after finding long-term support.
Although Gold was down slightly to the dollar it gapped up today versus the Euro after reaching an important 38.2% Fibbonaci Retracement and Long Term Trend Support. MACD supports that Momentum has shifted. RSI Crossed 50 today also a bullish sign.
Disclosure: Long Gold and Silver Mining Stocks