Hey everyone,
I hope you had a pleasant weekend. As for me, I had a great sushi dinner (ever had a sushi taco? hmmm!) on Saturday and enjoyed the South Florida sunshine all day Sunday.
Yesterday, we had a nice rally in the global markets and it seems to be continuing through today. However, the US markets (the Dow) opened down by more than 100 points but, as I am writing, it almost reached par but is now off by 2%. Will the dollar continue its rally? Is gold and silver dead? I think we will see a temporary rally, which should allow for you to monetize some gains or near break even positions. Nothing fundamentally has changed. So, do keep that in mind as you continue to see these wild swings and periods of high volatility in action.
Specifically, with the US dollar rally, I think it will soon end. When? I am not sure but I think it will occur by year end. The reason I think so is because the dollar is not in a bull market but rather in a period of short covering. This is similar to what was happening when the SEC threatened to make short selling illegal for financial stocks.
International companies typically borrow in a currency that is depreciating relative to their domestic currency. This allows for easier repayment of debt since their debt would fall in relative value to their earnings. So, when Russia invaded Georgia, this triggered a massive selling of euros resulting in a sell euro/buy US dollar trade. Consequently, we have been seeing the short covering of US dollars. During all of this, nothing fundamentally has changed with the US dollar. If anything, it has worsened with the ongoing pumping of US dollars into the system. Check out this stat…the Adjusted Monetary Base has soared from $873 billion on 9/10/08 to $1.017 trillion as of two Wednesdays ago! That can only be US dollar negative.
This is why I am now starting to buy some gold stocks (Seabridge, GDX, Barrick, etc) while maintaining a strong cash position because I don’t think we are at a bottom from an economic standpoint…the increase in credit card debt and default in auto loans have yet to hit mainstream. With the increased supply of US dollars in the marketplace and since gold metal is drastically outperforming gold stocks, I feel confident that gold stocks should be higher in the near term to a year from now. Of course, stocks can continue to get cheaper but, historically from a gold metal to gold stock ratio, that is unlikely. So, either gold stocks need to rally or gold metal needs to fall. I doubt the metal will fall considering the amount of US dollars we continue to pump into the marketplace. If I get a short term positive pop, I plan to sell because this market is still very volatile and no one went broke making a profit!
As for McDonald’s and Wal-Mart, which I have previously recommended, they are holding strong amidst the market volatility. JP Morgan included McDonald’s in its “16 stocks to own” list. As for quarterly earnings, I expect both to have had a great quarter.
There is still a lot of unwinding of positions by the hedge funds at moment. So, tread carefully in the markets, hold cash, and be quick to monetize gains. Hope your day goes well and here are some articles for your reading pleasure.
- Check out the new highs that gold is making in currencies other than the U.S. dollar. Here is the article.
- This article describes the strong demand for silver.
- Economist Mundell says China should buy all IMF gold to hedge its US dollar exposure. A bit extreme but an interesting article nonetheless.
- In this article, the IMF says that all major European economies will be entering a recession. As I said, more bad to occur…we are not in the clear yet since all of the current economic issues are global issues.
Until later,
Moolah
