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Good Morning Readers.
Boy was
I hot yesterday. That article in the Wall Street Journal by the Goldman Sachs
analyst Malcolm Southwood certainly put a bee under my bonnet. It’s not
hard enough trying to find the right stocks at the right time. I also have to
deal with what I can only characterize was completely inept reporting or
journalistic malfeasance. Rest assured I wrote to the Wall Street Journal and
Goldman Sachs and asked for Mr. Southwood to issue an apology and retract his
article.
OK, we
live to play another day.
As the result of the global financial crisis
which enveloped the world between late 2007 and early 2009, the world’s
governments were forced to step in and bail out the financial sector. This
unfortunately occurred as the Feds own revenue streams were under severe
pressure due to the issues in the private sector. To combat the massive
deficits that inevitably resulted, widespread quantitative easing (i.e.
unfettered money printing) was undertaken. Despite what you hear from
Secretary Geithner, Dr. Bernanke or anyone else in the administration, the
devaluation of the dollar is a key to this administration. It’s not
supernatural. It’s the only possible way we can begin to pay off the
ever increasing debt this nation has amassed. The policy of quantitative
easing is here to stay and the fiscal deficits in many countries have now
reached percentages of GDP that have almost always resulted in eventual
currency collapse. Thus, the frightening term ‘hyperinflation’ is
now being heard with increasing frequency.
Remarkably,
the use of derivatives has continued to grow, both throughout the global
financial crisis and during the ensuing recovery period. The fact that
derivatives played a major role in the financial meltdown seems to have been
conveniently forgotten. Attempts to regulate OTC derivatives, which
Congressional committees have been warned are “ticking time
bombs” and “financial weapons of mass destruction,”
surprisingly continue to meet with little resistance. The fact that many
derivatives are essentially worthless but are being carried on the books as
‘”marked to model” is creating an extremely distorted
picture of the health of the financial sector.
Despite
the fact that gold has been rising steadily for ten years and sophisticated
investors are climbing aboard to protect themselves from the ravages of
monetary debasement, conventional institutions and the average citizen remain
largely unaware of gold’s utility. When the next leg of the global
financial crisis arrives and stocks and bonds come under severe pressure,
investment demand for gold could potentially rise exponentially. To
facilitate this demand, new gold investment vehicles are being created.
You know
silver, which has always been considered poor man’s gold, is doing well
when the commentators start giving it the “gold” treatment.
Silver’s recent rise was so spectacular that it caught many investors
off guard. It’s natural to be skeptical when you don’t know the
fundamentals driving such a strong performance are. I believe the spike in
silver was driven by the devaluation of the dollar and the middle class
average guy wanted to buy something that would be a hedge against inflation.
Since silver was much cheaper that gold the ensuing mania took place and ran
silver up to historic levels. The extremely overbought levels that it
achieved led to the expected selloff. A look at the chart will show that
silver has now corrected to its first level of support.
It is
important to remember that when any commodity has a parabolic run-up like the
one we experienced in silver, we can expect to see a violent correction. I
was amazed to see the SLV ETF run from $48.15 to 33.30 in five days but in
hindsight it was warranted. Einstein said that “for every action there
is an equal and opposite reaction.”
Having
said that, it is important to remember that during times of great emotions
and volatility we must focus on the big picture. We have seen silver rise
over 150% followed by a violent correction, gold’s march past $1500.00
and the U.S. dollar breaking into yearly lows since August of 2010. There is
no doubt in my mind that investors have come to realize that the global debt
problem is spiraling out of control. The demand for precious metals will only
continue as investors are hedging against the devaluation of currencies.
Legislators
are concerned with an election in 2012. They are acutely aware that
aggressive entitlement cuts will be painful to their reelection bids. Central
bankers a concerned about exiting quantitative easing as one in four home
owners are still underwater and one in ten are unemployed. The economy is
clearly not on a solid footing and I see no end in sight.
Precious
metals and mining stocks provide the ability to generate value during this
period which I believe may last through 2020. Do not forget, just like we
just saw in silver there will be volatile and healthy pullbacks to shake out
the investors who are playing on margin and are highly leveraged. It is
essential to learn how to buy only when the excess has been purged. Buy on
dips, when support is being reached and sell on rips when conditions are
oversold. Before the correction, the Silver ETF was trading the volume of the
S&P 500. Silver was outperforming gold by a rate of five to one and
overhead resistance was surpassed at $40.00. All the indicators were flashing
red warning signs of a painful pullback to shakeout speculators.
Well,
I’m not sure if the speculators have been punished enough so I
don’t know where silver will bottom but I do know that silver will be
$60.00 by year’s end. As the value of the dollar continues to decline
and the signs of inflation continue to appear people will continue to pile
into the fiat currencies of Gold and Silver. As I have said earlier, for the
average working “Joe” silver is more appealing as it does not
take a large portion of what little disposable income he has to amass some
hard assets and feel a measure of safety.
According
to my chart the first level of support was $35.00 and we breezed through that
with a close of $34.50. I opened a small position at $34.30 because SLV could
possibly test the next level of support which is $28.00. It so happens that
the 200 day moving average is sitting at $28,00 so I think the odds are slim
that we will see a test of that low but charts don’t lie and there is a
possibility of that happening. The reason I open my positions slowly is that
SLV will bounce around in the $35.00 to $28.00 range for a while as it forms
a strong base. When I feel secure that it has broken out, I will have plenty
of powder to increase my position. In the unlikely event that it immediately
begins to breakout from this level I can buy on the way up. Be forewarned!
The ride up on SLV will not be the parabolic move we saw just recently.
People have short memories but not that short. I believe that this ride up
will be a choppier ride. Either way my charts tell me next stop on the silver
train will be $60.00 by the end of the year and $100 by 2013 or 2014. It
is important to note that silver is very volatile and has to be watched on a
continual basis because it can reverse, for absolutely no reason, in a
heartbeat. It is also important to remember that while silver does have
industrial applications the underlying value is in the perception of the
herd. People see the dollar getting crushed and want to have some hard
assets. Gold is too expensive for the average guy to buy so he turns to
“poor man’s gold” because for the same amount he spent on
one ounce of gold he can own 15 to 20 ounces of silver. In this game
perception is everything.
Meanwhile
the mining stocks I own are getting crushed. There was some good news that
came from General Moly’s meeting with the fine people of Eureka,
Nevada. They wanted to be sure that this mine would not, in anyway, pollute
their ground water and I can say with certainty that this company does not
want to see that happen. According to one of my sources, who is close to the
situation, “the whole hearing took about 2.5 hours, about 15 minutes of
which was the County’s attorneys cross-examining Pat Rogers. Much
ado about nothing I think, but it probably makes for a cleaner legal record,
so we support the SE’s additional day of hearing in the end.” If
General Moly continues to sell off I will look to add to my position but I
believe the selloff of mining stocks yesterday was due to the “dead cat
bounce” in the dollar which caused it to strengthen by about $.03 to
the Euro, the inept reporting by Goldman Sachs analyst Malcolm Southwood,
which was front page news in the Wall Street Journal, the reported weakening
of the Chinese economy combined with an overall market selloff.
It is
clear that the market has shown that we are nowhere near a top in Rare Earth
Mining Stocks like we have seen in the speculation in bullion. As I have said
in my posts time and again, sooner or later the world will wake up to the
fact that gold and silver are not the only precious metals and I believe, in
time, our mining stocks will have their day.
It
promises to be another exiting day so Stay Tuned!
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