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In spite of money drops and
liquidity injections we continue to see a volatile scary stock market. Will
the Fed ultimately lose control and the stock market deflate or will the
money presses continue to levitate the stocks at the expense of the Dollar?
The market got its ¼ point rate cut on Wednesday the 31st of October
and has been slaughtered ever since. Gee, thanks a lot Mr Bernanke!
The markets message is clear – Market to Fed: Send more money! More
rate cuts please.
We've been telling subscribers for a while that this market is resting on
quicksand. This is a market which requires constant support, hugs and kisses
from the Fed in order to remain elevated. So a ¼ point didn't do the
trick this time. No problem! You can bet the Fed will be back in December
bearing further gifts – maybe sooner.
In fact, we've been so sure the the official policy is “support the
markets and to hell with the Dollar” that we've been advocating buying
non-resource stocks as well as our regular Gold and Oil stocks. The thinking
being that the stock market is headed higher on a Super Inflationary Wave (forecast of u. s. inflation
rate)
Lucky for us we've got some hard thinking subscribers who pointed out that
our views are somewhat inconsistent.
For years we've been saying that nothing will prevent this Gold Bull market
from expressing itself fully. No amount of government intervention or
derivative games will prevent Gold from going to 4-digits and beyond.
Ofcourse we still stick to that.
But now subscribers are telling us (and rightly so) that we've done a
flip-flop by saying that the Fed will be able to constantly elevate the stock
market by reducing interest rates.
So which one is it?
Can the Fed manipulate the stock market and keep it rising forever or will
market forces eventually prevail as in the case of the Gold?
Truth is, its not much of a question. If growth in earnings is real then
stocks should naturally outperform Gold. There should be no need to
artificially support the market by printing obscene amounts of money.
However, today we have a situation where growth is being engineered through
the printing press. How do we know this?
Illustration 1: Stock Market falling against Gold but rising in Nominal
terms (below)
Gold / Real money has been outperforming the Dow since 2000 and it now looks
as if it is about to enter the next phase (target of 10 ounces : 1 Dow). The
bottom of the chart shows the S&P500 in Dollar / nominal terms. Fact is,
even though the S&P is higher today then in 2003, in real terms (as
measured by Gold) it is quite a bit lower. We're about to learn the hard way
that PROSPERITY CAN NEVER BE PRINTED. If it could, Zimbabwe would be the worlds
super power.
So whilst we will continue to get scary days like we've seen over the last
2 weeks, we feel that the Fed through its unlimited printing press will
continue to keep the Stock market Bear at bay but will sacrifice the Dollar
and keep Gold well bid.
Greg Silberman
CA(SA), CFA
greg@goldandoilstocks.com
I am an investor
and newsletter writer specializing in Junior Mining and Energy Stocks. Please
visit my website for more free articles and analysis
Click here: http://blog.goldandoilstocks.com
This article is
intended solely for information purposes. The opinions are those of the author only. Please conduct further research and
consult your financial advisor before making any investment/trading decision.
No responsibility can be accepted for losses that may result as a consequence
of trading on the basis of this analysis.
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