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-- Posted Wednesday, 12 November 2003 | Digg This Article
Several trends have been evident during much of 2003; trends which have made believers a pile of money. If you bet on a declining dollar, you’ve been a winner almost any way you’ve played the greenback’s decline, be it in the commodities area, foreign currencies or foreign government bonds. If you’re a gold bug and have acted on this conviction you’re also happy, with gold now up better than 50% from its lows and gold stocks still in a torrid up trend.
Even stock traders on Wall Street have had reason to feel giddy. Massive injections of liquidity by the Fed and Uncle Sam have goosed earnings, economic activity and stock prices. Though stocks have weakened a bit over the last few days, they remain near their highest levels in almost two years. The $64,000 question now is whether these various trends will continue or not. Gold and stock bulls together with dollar bears must look anew at the reasons why their chosen trades have done well thus far. More so, they must ask themselves whether the confluence of factors they’ve ridden to profits might now be changing, and whether their best course of action is to start taking some money off the table (after all, as the old saying goes, bulls make money and bears make money—but pigs get slaughtered.) In short, it’s time for some realism—and for a “gut check.” GOLD’S DRIVERS: We’ll start with gold, which just a short time ago saw its highest close yet in New York, settling out on the cash contract at $394.20 per ounce, up $6.60 on the day. Earlier, gold hit an intra-day high of $397.00. Setting the table for the latest assault on the $400.00 per ounce level was a sudden surge in options-related buying this morning. As the price pushed above $390.00—abetted in part by a surging euro—those who had previously sold call options with that strike price quickly found themselves having to become buyers, in order to limit their losses. Technically, gold could hardly have behaved better over the last few weeks. On several occasions it managed to establish its own “Maginot Line” in the $368-370 per ounce area during the first half of October. Since then—and notably in spite of continued strength for stocks—gold has gained some momentum, now with the $380 per ounce level as near-term support. This has put added pressure on the previous overhead resistance in the $392-394 area (hit three times over the past month and a half.) $400.00 gold has seemed just as elusive as a sustained gold price above the $325-330 level did for the second half of 2002. As gold bugs do their own gut check right now, two sobering thoughts are no doubt entering into the equation. First, as Mineweb’s Stewart Bailey reported on Monday, miners were significantly less active in the third quarter in reducing their hedge books, closing out (i.e.—buying back) 2.3 million ounces in the September quarter against 4 million ounces in the second. Clearly, gold has been able to move higher in spite of this, as investment interest continues to perk up and, most recently, as all the markets are beginning to pay renewed attention to the dicey geopolitical picture. Second, I for one remain concerned that the Federal Reserve—perhaps joined by other central banks—will make additional attempts to defend their own Maginot Line. As we know from past experience, the Fed has significant means at its disposal to do this. As for the others, one possible means to take some wind out of gold’s sails could be an earlier-than-expected announcement of a renewing of the 1999 Washington Agreement. Previously, reports were that no such announcement (which is anticipated to bump up annual sales/leasing limits from 400 metric tons per year to 500-600) would be forthcoming until after the beginning of 2004. However, among other things, central banks are petrified of a new breakdown in the dollar’s value. That could be postponed for a while if gold is held in check: after all, these folks fully realize that a surge in gold well above the $400 level could just as easily cause a dollar plunge as be the result of one. Longer term, the evidence remains solidly in favor of a continued bull market for gold. For now, if we don’t see a fairly quick follow-through to today’s seeming break-out (or if we do, but it’s followed by some central bank “sabotage”) new highs and additional momentum might be harder to come by. THE DOLLAR: If gold’s technical behavior of late has provided a bullish picture, that of the U.S. dollar is the opposite. In spite of Wall Street’s surge and the recent plethora of seemingly bullish news for the U.S. economy, the greenback has failed to benefit. In textbook fashion, in fact, the dollar last week failed to move above its 50-day moving average and has weakened further. A new ingredient was added to the mix last week when the central banks of both Australia and the United Kingdom raised short term interest rates. Though Fed Chairman Greenspan and his cohorts continue to insist that they won’t raise short-term interest rates until the Second Coming (if then) the markets are beginning to smell a little trouble. Until now, the dollar has resisted an all-out bloodbath due both to the perception that the U.S. is still the major “growth” play among developed nations, and to the massive intervention by Asian central banks. As one famous saying goes, though, “Whatever can’t last, won’t.” The U.S. current account and budget still bleed torrents of red ink. The allegedly fiscally conservative Bush Administration is borrowing and spending at this country’s greatest rate since Lyndon Johnson’s Great Society. Last but not least, one can’t help but be concerned that the increasing turmoil in the Middle East might take on an even nastier character. Having failed to break out of its downtrend, the dollar may next “challenge” its bear market lows. Whether those are broken sooner rather than later, the handwriting is on the wall, however; and the dollar bears, of all our groups of investors doing a new “gut check,” have the most reason to remain confident that their play will go on for some time to come. STOCK TRADERS WONDER: Having already priced in all the recent economic news—and arguably much more—some stock market bulls are undergoing their own search for the meaning of life in November, 2003. Better news on jobs and economic growth failed to move the markets last week to convincing new highs. The bulls, as I quipped in my November issue are behaving a little like a dog who’s been chasing a car, has finally “caught” it, and doesn’t know what to do with it. It’s sinking in to at least a few that the “growth” spurt of the third quarter was a one-time event made possible by tax rebate checks and a peak in refinancing activity. With households deeper in debt than ever before, it’s become a bit more reasonable to ask whether or not the third quarter’s activity will be sufficiently extended to not only bring about even higher stock prices, but ratify those we see right now. Based on fundamentals, the answer is clearly “no.” This is not to say that stocks’ technical strength of the last several months can’t lead to new highs—especially if gold can’t crack $400 and the U.S. dollar can get its feet back under it and hold above the level of 90 on the U.S. dollar Index. Increasingly, though, investors are having to deal with looking harder at Iraq, a possible broadening of a trade war between the U.S. and Europe, debt levels (public and private) and more. The stock bulls also have to wonder why—if things are getting so much better for the economy—corporate insiders accelerated their selling spree last month. According to Thomson Financial’s Kevin Schwenger, insiders sold an astounding $59 worth of their shares in October for every $1 they bought, the most lopsided ratio in a decade. This was the sixth month in a row where sales outdid purchases by at least a 20:1 ratio. Clearly, Corporate America’s television sets have not been tuned into CNBC. Adding to the selling pressure are new outflows from stock mutual funds in the wake of scandals involving Putnam, Strong and others. Though much of this money has been plunked down elsewhere, last week ominously saw net outflows from stock funds of nearly $1 billion. This bears watching, especially as some fund managers and institutions must simultaneously be wondering whether—rather than being “pigs”—it’s time to stop tempting fate, and cash in some of 2003’s gains. For a sample issue of The National Investor, e-mail chris@nationalinvestor.com.
-- Posted Wednesday, 12 November 2003 | Digg This Article
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