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Well seasoned traders know that for any trade to
work, to work big, that trade needs to be in synch with primary trend of the
market.
Now clearly the Fed is a
not for profit enterprise, but their well healed trading houses should have
know better. For months we have witnessed an expanding money supply and for
months we have seen a strong bid come into the markets at the most opportune
times. But regardless of all the stimulus and props, the markets have spoken
loud and clear as the Dow closed below its August lows. Reasserting the
traders principal that it is never wise to fight the tape. For all the Feds
machinations and rate cuts it seems we may still be on the verge of a bear
market.
To be honest, we thought
the Fed would be able to inject enough liquidity to keep the markets
levitated. We thought this bull run in gold stocks would coincide with
further strength in the stock market. But as the Dow broke below its August
lows yesterday (and gold stocks remained above their August lows) it seems
this was not to be. We are left asking the question:
Will gold stocks eventually
fall with the stock market or will we see a divergence as in 2000 - 2002?
Chart 1- Yield
Curve widening; NY Composite falling (green) ; HUI rising (pink)
It is important to remind
ourselves that gold’s biggest catalyst is a loss of confidence in the financial
system.
A proxy for confidence in
financial market terms is the yield curve. When the yield curve widens (the
red chart is rising) it signifies a response to slowing economic activity. That
is, the Fed reduces short-term interest rates versus long-term rates in order
to encourage borrowing short and investing long. This happens during periods
of slowing eco growth such as now.
Another proxy for
confidence is obviously the stock market itself. The green line is the New
York Composite index which by no coincidence is starting to fall as the yield
curve widens (much as it did in the 2000 – 2002 blue rectangle).
It was under these same
conditions that the HUI (pink line) first took off in late 2000 rising over
300%.
The [false] notion that
gold stocks are high beta plays on the stock market arose in 2003 and again
in 2005 when both markets rallied together under a deluge of liquidity. In
our opinion, the difference between today and then is that earnings growth in
the NY Composite index will be hampered by credit and consumer problems,
whilst gold stocks will be emerging from a 1 year consolidation and likely to
offer far better value.
That is, whilst the New York
Stock Exchange remains on the edge, we think gold stocks will
surge as the primary beneficiaries of fresh liquidity.
More commentary and stock picks follow for
subscribers...
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.
_______________________________________________________________________
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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