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This week saw a major change in position from
some serious market students.
Chief amongst them was Richard Russell the Dow theorist from
dowtheoryletters.com. I admire Richard’s work immensely so when he
stands up with a big change like this, I listen!
Richard had been extremely bearish on the stock market for over 5 years now.
Then WHAM, last week he decided to reverse his stance. I believe he now
expects a serious correction and then a resumption of the Bull market.
Thus begs the question, are we in a Secular (20yr+) Bear Market or is
it still a Bull market AND more importantly, are we
still right to be Long-term Bullish on Commodities?
The devil ofcourse is in the detail and in
this case, it’s how we define a Bull or Bear market.
Here’s what we know:
If we define markets using relative values such as P/E ratios or as we
commonly do, the Dow in terms of Gold, it appears that 2002 was a watershed
year.
Chart 1 - Dow in nominal
terms (top) ; Dow vs. Gold (bottom)
In terms of Gold, the Dow broke below a 20-yr rising trend line in
2002. This caused many market students to declare the end of the Bull market
in stocks and the beginning of the bull market in Gold and
‘things’ i.e. commodities.
Historical P/E ratios (not shown) followed a similar pattern topping out at
an S&P500 P:E of 30 in 2000, correcting to
15 by 2003 and now hovering around 20.
In other words, in terms of Gold, P/E ratios and foreign currencies
(most notably the Euro), the ‘Real’ Dow seems stuck in a secular
bear market quagmire and has failed to take out the 2000 highs by a long
shot.
However, in terms of Nominal Dollar values (top of chart), the Dow is
making new successive highs daily. And it’s the nominal Dollar highs
which get the media excited and attracts all the attention. Serious market
students, like Russell, believe that a nominally priced Dow will discount the
effects of the Dollar losing its purchasing power and it may very well be
doing that now!
A higher nominal Dow coupled with contracting P/E ratios and higher
Gold prices SMACKS of growth engineering through MONEY CREATION.
Nowhere is this more apparent than in this chart:
Chart 2 - Euro: Yen and
Chinese Shanghai Index (green line)
The strongest of the major Fiat currencies has been the Euro and the
weakest the Yen. The Euro has been on tear vs. the Yen rising over 20% in a
little over 1 ½ years. A rising Euro vs. Yen gives an extreme
graphical of the Yen carry trade which adds a flood of liquidity into capital
markets.
Now, it’s not by chance that the Chinese Stock market (green
line) has gone parabolic in the face of this mass of liquidity. Yes,
fundamentally there is real growth in China, the likes of which we have
never seen before. But historically all markets go to extremes when a good
story meets easy credit.
Secular Bull in Gold and
Commodities
The biggest
surprise to me is how successful central bank monetary policy has been to
buoy asset prices. Add in artificially low interest rates through Dollar
recycling and you get a world which believes inflation is not a problem and
economic growth is great.
If commentators
(such as Russell) are correct and the trend will continue for years to come,
then imaginary growth will support higher commodity prices and bouts of
inflation scares will boost Gold prices.
If people
somehow manage to look beyond the paper façade and decide to protect
themselves in a HURRY, Gold and things will have an even brighter future
ahead.
As to what will
wake people form their slumber, I’ll handle in subsequent letters.
Greg Silberman
CA(SA), CFA
greg@goldandoilstocks.com
I am an
investor and newsletter writer specializing in Junior Mining and Energy
Stocks and Short Selling Over-Valued Stocks. Please visit my website for more
free articles and 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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