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This
is a follow up to the Q1
2009 Summary On Gold And Various Markets issued on March 31,
2009 ( http://new.goldmau.com/article.php?id=1610
) In the first quarter of 2009, we reached the climax of US banking collapse.
Global central banks hurried to apply fiscal and monetary stimulus, including
unconventional
“Quantitative
Easing”, which entailed the printing of over $1.5 trillion to buy
troubled mortgage and derivative assets. Our conclusion then was:
“In Q1 we likely saw the peak of the
dollar. Mr. Bernanke and Mr. Obama continued with hyper-inflationary fiscal
and monetary policies which will spark the resumption of commodity bull.
Asian markets are breaking away from US equities, this is what we
anticipated. I look to accelerated global recovery and volatile markets, with
positive uptrend ahead. “
Back
in March, we were quite possibly the only optimist calling for the recovery
in the equity markets. The following charts demonstrate we should have been
more bullish!
So
what’s in store for the rest of 2009?
Gold:
We
said in March:
“Fiscal deficits and record low rates
will further provide momentum for gold. The chance of reaching past $1,000/oz
has been further bolstered by oil's strong comeback at $50. For Q2 I look for
range bound between $850/oz and $1,000/oz.”
Gold
indeed took a breather while allowing commodity and equity markets to catch
up. Now with crisis talk receding, inflation and deficit concerns will return
to center stage. I look for gold to first break out of $950 by September, and
rocket past $1,000 by end of October. Technically the above bullish reverse
head-and-shoulder pattern predicts a peak for 2009 of $1,300-$1,500/oz
USDX
In
March we said:
“The dollar performed its best act and
was squeezed to 89 before long term poor fundamentals come back in to play. I
look for a dollar correction that will take the index back 80 in Q2 and 75 in
2009.”
Our
call on the dollar was spot on. The dollar looks to have just broken down
from the bearish head-of-shoulder formation, this means dollar is going down
further to 75 shortly. Because strengthening Asian currencies (other than the
yen) are not in the dollar index basket, I am not as bearish as other
analysts on the dollar index and would peg my conservative low target of 70
in 2009.
S&P500
We
said in March:
“S&P500 staged a panic bottom in Q1
from banking crisis and is back trading above 800 level. With zero% interest
rate and vast money looking for a home, we are neutral to mildly positive on
the index. “
Back
then we drew 1,000 as being the upside mark. The index reached that target
with ease in July. Since the fundamentals for the US economy has not improved
at all with double digit unemployment rate, this liquidity driven rally could
take a breather before the next advance. I look for index to be range-bound
between 900 to 1,150 for 2009. The lower the dollar goes, the higher
S&P500 will be.
Gold stocks
We
said in March:
“The XAU zoomed to 140 in Q1, which is
quite extraordinary given the extremely poor climate in equity markets. There
is a lot of resistance ahead at 150 which will likely cap the index for Q2
while base metal and energy sectors play catch up. “
XAU
matched our call for Q2 as it zig-zag’ed its way to 150. With gold
primed for a major breakout, XAU presents the lowest-risk entry point for the
year. I look for the index to take out 150 by September, with first target
being 170, then 200 by year end. I have a feeling the 200 target could be
conservative.
Oil
and Copper:
In March
we said:
“In Q1, China started stockpiling base
metals and energy markets started to return to normalcy from extreme margin
selloff. Remember, commodity prices go up regardless of economic activities
in times of inflation, just ask the Zimbabweans with 85% unemployment and a
loaf of bread costing 1 trillion Zimbabwean dollars.
Base metals and oil have staged very healthy
gains in Q1, prompting us to possibly raise our above target for the year.
For Q2, oil is likely to be between $40 and $60, while copper stays between
$1.75 - $2.25 “
It
turned out we were conservative in our already optimistic call for oil and
copper. Given those two growth commodities have doubled from the 2009, I would
be cautious to step in at this point. The lows I see for oil is $50’s
and for copper is low $2’s. I am cashing out copper producers, rotating
to gold and copper juniors companies.
S&P
TSX Ventures Index (Proxy to Junior Mining Stocks):
We
said in March:
“Our call here has been mostly correct.
I am mildly surprised by the relative strong performance of the junior
resource sector in Q1 (up 35%). While I don't see much downside as value
plays abound, note there is strong resistance at 1,000. “
Investors
snatched up bargains in the junior sector, which helped propel the index to
1,200. Lots of analysts are recommending taking profits out of the juniors.
If copper nickel and gold stay above $2 and $6 and $900 respectively, we
won’t see any prolonged correction in the junior sector as there are
still many bargains that are 50%-70% off from 2008 peak. I think a better
strategy is to keep a good portion of funds and rotate positions within
juniors. My conservative target for the index is 1,500 by year end.
Global
Equities (using Shanghai Stock Exchange Index as Proxy):
I
said in March
“Shanghai rebounded 25% alone in Q1,
faster that I anticipated. The index has de-coupled from the US equity
markets and the chart is very bullish. I would raise my target for the index
to 3,000 for the year. Buoyant Asian equities will have a positive impact on
commodity prices.”
Again
I was being too modest with my forecast. China is the most populist country
and is the world’s third largest economy, so the doubling of Shanghai
stock exchange from its Oct low is no small feast. While I don’t see
any severe prolonged correction, the chart indicates congestion between 3,500
and 4,000, which is now my upside target for 2009.
We
are entering a new renaissance:
With
the talk of financial crisis receding, the focus will be back on the dollar.
The US budget deficit is projected to reach $2 trillion in 2010. As the
generation of baby boomers enters the entitlement phase, the deficit will
only likely to go higher. Medicare spending for the first time exceeded
contribution, and the Medicare trust fund became a net seller of US treasury
instead of being a contributor. While the budget deficit situation is
alarming, what concerns me the most is the waning appetite of foreign
investors on dollar debts. Dollar debts owned by foreign investors currently
stand at over $12 trillion. China, Brazil, India, and Russian are
explicitly warning US to reign in deficits to save the dollar. I wonder when
their patience will run out.
The dollar standard lasted 4 decades and channeled
70% of the world’s resources and investment to America, a country with
5% of the world population.
The
jettison of the dollar standard will ensure uniformed distribution of wealth
and investment throughout the world. I would boldly state that the global
growth will accelerate as we enter a new renaissance with industrial and
hi-tech revolution that will put the 1900’s industrial revolution to
shame.
What
to do now?
In
my June article titled “How Equity And Currency Markets Behave After
Financial Crisis” (http://new.goldmau.com/article.php?id=1816)
I stated that hoarding dollars after a debt crisis is the worst strategy.
There is still time to diversify. Sign up for our newsletter package at
GoldMau.com, and the independent thinkers such Lawrence Roulston and Aden
sisters will share their views on how to come out ahead.
John Lee, CFA
Goldmau.com
All
other articles by John Lee
John Lee is a portfolio manager at Mau Capital Management. He is a
CFA charter holder and has degrees in Economics and Engineering from
Rice University. He previously studied under Mr. James Turk, a renowned
authority on the gold market, and is specialized in investing in junior gold
and resource companies. Mr. Lee's articles are frequently cited at major
resource websites and a esteemed speaker at several major resource
conferences.
Please visit www.GoldMau for instant market alerts and stock updates.
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