Yesterday in the news the strategist Dennis Garman appeared in multiple articles regarding the surge in gold prices on currency concerns, which I believe should have read “Dollar downdraft on QE2, mortgage fiasco and general credit quality concerns”. In a Bloomberg article Gartman accurately describes the situation as “Gold has become the world’s third reservable currency as all currencies seem intent upon racing each other downward.”. Of course dear reader, this is Gartman's flavor of the day, after all just a couple days ago he was flip flopping that the dollar was to rise and gold correct and he would not be a buyer, because the metals were “hyperoverbought”. Lo and behold yesterday right in the Bloomberg article he was advising clients to buy the metal, advice that I agree with especially on pullbacks in price.
In my October 4th blog piece entitled, “Hyperoverbought – Really is that even a word?", I argued that the traditional measures that are being used to determine market timing indicators like overbought and oversold are not functioning as they used to. There is an old technical analyst saying that goes something like this, “an indicator is good at accurately predicting what should happen until it no longer works”. The issue that Gartman and others do not get is that there is a paradigm change and being in uncharted waters the old tools are not nearly as accurate as before. The boom leading up to this mess and all the FED and US Government actions to date have skewed and distorted the economic situation so drastically that actions that worked in the past no longer do. Adding gas to the fire is the remedies being implemented tend to have unintended consequences; resulting in market action that has gone from linear to chaotic.
Additionally, on October 12th we had Credit Suisse come out with a report asserting that based on net negative speculative positions in the dollar that there is a 100% chance that the dollar will rally and choke off any stock and commodities rally. Once again while this has been true in the past nothing works 100% of the time. The reality is there is no way to know if the old psychology will prevail or if a new reality is forming. I tend to feel that even with all the negativity surrounding the dollar, which based on circumstances, is justifiable, that there has been a sea change that will catch the markets off guard. The FEDs Tuesday announcement confirms the pronouncements from other FED officials that generating inflation is a policy target going forward. The FED is trying to orchestrate an orderly decline of the dollar, the only problem is that everyone else in a similar boat. The FED can take the dollar down but their moves will be matched lockstep by all the other world currencies. The race to the bottom as it has been coined will ultimately wreck all the currencies which is why gold and things in general are defying the odds.
An additional coffin nail for the dollar could be the “Mortgagegate” scandal. In fact Jim Sinclair had posted a piece that I came across in which he discusses the fraud of the securitized mortgages and that it will be the death knell for many financial institutions. I am taking it one step further as I believe that this will be yet another reason for the dollar’s decline and it will limit any kind of oversold bounce if there is one.
So other than precious metals I would still advise people to look at “things” in general especially items society cannot go without like food, water, agriculture, energy, certain technology, consumer staples, certain infrastructure plays and defense. If you are so inclined to gamble one can play the currencies against each other as there are many ETFs that allow you to participate in the up and or down move of a currency. If you do play currencies I would not recommend doing it through the futures market as it is beyond most investors knowledge and time capabilities. Your best bet is still to look at the precious metals to start and the mining shares once you have a position in the metal. If you have concerns about acquiring the metal then refer to my earlier blog post entitled “Gold Doesn’t Have To Weigh A Ton”, which provides some thinking regarding acquiring the metals through your brokerage account.
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