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One must not confuse a technical reaction
with a dead cat bounce. The dollar until yesterday had been experiencing a
dead cat bounce. In the last eleven months we have seen the dollar crater
from 88 on the $USD to break support at 74 and continue to 71. It is not only
usual but healthy that the dollar would experience a bounce as we know that
nothing goes up or down in a straight line. I characterize this strengthening
of the dollar as a technical correction. Indeed yesterday as I expected, we
saw the dollar start to roll over and correct back down. This was not
unexpected as ECB President Jean-Claude Trichet decided
not to raise interest rates causing the Euro to lose value against the
dollar, thereby strengthening the dollar. It is important to remember that no
matter what is reported in the news or what Secretary Geithner, Dr. Bernanke
or President Obama says the devaluation of the dollar is a key to this
administration’s policy. It is the only way we can possibly even begin
to pay off the staggering debt that has been run up by the Feds. If I
believed the rhetoric from the Feds, this would lead me to conclude that the
rebirth of the dollar will lead to the death of precious metals and
commodities. I believe, however, that this premise is blatantly absurd.
I
do not buy into the rhetoric that is being espoused by the Fed and the
talking heads on the media. I believe that hard assets are nearing an
intermediate bottom. Take notice of the fact that copper is reaching long
term support after not participating in the gold and silver run up in 2011.
The rare earth and uranium stocks have not seen the increase in price that
the underlying asset has achieved. This violent selloff leads me to conclude
that the second half of 2011 may see a very powerful move into commodities.
Investors
will soon realize that the Feds will continue to devalue the U.S dollar to
pay back its soaring debts and the bubble in the commodity market will be
seen for what it is a ploy to distract us. Let us remember that President
Obama is riding on a wave of popularity right now, hoping Bin Laden's death
will distract Americans from the insidious Washington agenda to steal your
money and your freedom. At times like these we must remember the teachings of
Jesse Livermore who said “it is not the news but the reaction to the
event that is important.”
The
fact is that the fundamentals of mining companies have not changed at all.
Indeed, mining companies like BHP are unable to even meet the growing
emerging market demand. Asian demand for basic materials and rare earth
supply is increasing exponentially. We must not forget the long term
fundamentals and technical patterns. I would not be the least bit surprised
during this dollar dead cat bounce to see China, the largest holders of U.S.
Dollars, use this opportunity to diversify away from the U.S. dollar into
natural resource assets. If you remember, last summer as the Euro got crushed
and the dollar strengthened, China made a major deal with Cameco, which
transformed the uranium sector. I see something eerily similar in the rare
earth, lithium or uranium space happening in 2011.
The
pullback in silver and copper may be reaching an end. The dollar dead cat
bounce has caused a lot of weak holders of hard assets to trade in their real
wealth for fiat currencies. In my opinion this is a grave mistake. As Gerald
Loeb teaches us it is human to look at a bank statement and see that we have
more dollars than we did yesterday and feel like we were wealthier than we
were yesterday but this thinking is folly. What is important is not how many
dollars we have but what the value of the dollars we have represent. I
believe it would be a mistake and dangerous to fight the secular bull market
trends by exchanging critical natural resources for U.S. dollars. Remember
that over the past two years these sell off in commodities have been followed
by incredible rebounds.
As
we are aware silver broke out in January at a recommended buy point of $26.00
and saw an amazing parabolic run up to $48.15. It is both normal and healthy
for a market that went up 12 weeks in a straight line to experience a
technical correction as the pace of the move was too fast. Subsequently, SLV
declined 30% entering a bear market in four days in four days, after reaching
record highs.
The
selling of silver by overleveraged speculators caused one of the worst sell
offs in commodities in recent history. Now my readers are asking if they
should sell off their holdings in uranium, rare earths, lithium and precious
metal mining stocks and go long into the U.S. Dollar. We are most certainly
reaching a moment of truth and key trend support. It is during these
pullbacks or technical dips where the money is made in commodities.
As I
reported in yesterday’s post I had opened a small position in SLV at
$34.30. My thinking was that it had reached its first level of support but
thought it could pull back to the 200 day moving average as a secondary level
of support. I quoted Einstein who said that for “every action there is
an opposite and equal reaction” Well in the pre market and at the open
SLV continued to crater and as we saw the extremely oversold conditions drive
the price to $31.97. It at once did an about face and raced up to
$34.50. Today I think that a level of support has been put in at $32.00 but
for now I will stand aside as I have no idea of what level SLV will test. If
it retests and breaks below the $32.00 level it could easily run to the
$28.00 level and if it broke that level we could see it pull back to $18.00.
As I have often stated the silver market is a very volatile market. The price
of silver is based on perception, fear and greed. I think the odds of
breaking the $32.00 level are very slim but I see it as my job to give you
all the facts and not what I think will happen.
I have
often said that my post better than going to school because I play with live
ammo and you get to see my failures and successes in real time. Having said
that, I will be a buyer of SLV at the $32.00 (+/-) to $35.00 level as I
believe that as the dollar continues to weaken as the dollar weaken, people
will run to buy gold and silver as a hedge against the devaluation of the
dollar.
I do
want to remind my readers that I have not forgotten about General Moly (GMO)
who had a very successful hearing with the people of Eureka Nevada last
Wednesday, 05/11/11, who were rightfully concerned about the contamination of
the aqua fir. The fact that all questions were answered and the fine people
of Eureka were satisfied with the answers should go a long way with the
Bureau of Land Management in expediting the permitting process.
Yesterday’s spike in the price of 8% should confirm my assertion. Let’s
not forget that when this company does receive their permits they will
receive a $685 million dollar loan from the Hanlong
(USA) Mining Investment Inc., who continues to be a supportive,
long-term strategic finance partner and is dedicated to the success of the
Mt. Hope project. CEO, Bruce Hansen, said “We continue to work
hand-in-hand with Hanlong on the Chinese bank financing, which is progressing
well." I don’t have to remind my readers that the Chinese are not
philanthropists. They know that once this project is permitted, General Moly
will have the largest undeveloped deposit of Molybdenum in the world and I
also don’t need to remind my readers that Gold and Silver are not the
only precious metals. Today promises to be a very interesting day.
Please stay tuned for updates and you can find my videos on YouTube under the
“nom de plume” InvestingAdvicebyGeo. Please check them out.
Have a
great weekend!
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