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Credit Crunch
Success Requires Lower Dollar
By Greg Silberman
January 4, 2008 (GoldAndOilStocks.com) –
How worried should we be? Gold stocks and the stock market
continue bleeding (although Gold Stocks have stage a
mini-recovery). Not a day goes by without a fresh cash
injection by some central bank or sovereign fund. Where can we
invest a) safely and b) to profit from the volatility?
Let’s see?
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We’ve had Treasury Secretary Henry
Paulson’s plan to freeze
interest rates on a limited number of “teaser” subprime loans
for 5 years.
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We’ve had the Fed, ECB, Canada and Swiss
Central Banks making money available via forex swap lines.
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Rate cuts in the US, Canada and England
to stimulate borrowing.
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We’ve had a $40 billion Fed ‘auction’ to
lend banks money.
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We had the ECB make an unprecedented E350
Billion available to help 390 private sector banks with
year-end rollovers.
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And countless billions coming from the
Middle East and China to recapitalize major banks.
Money is raining from the sky and it’s no drizzle, it’s a
veritable flood. Yet the credit problems persist. What’s going
wrong?
The reason: Bankers are still too scared to lend amongst
themselves. Not knowing what the other guy holds and whether
they will ever get their money back, it’s the old fashioned
game of musical chairs and nobody wants to be left holding the
bag.
But wait, that’s not all, now we’re seeing troubling signs of
inflation showing up (which is no surprise given the amount of
monetary stimulus). Food prices are surging, Platinum has hit
new highs and Gold is not far behind. New money seems to be
flowing in the wrong direction. Far from stimulating economic
growth, new money is causing price inflation in the things we
need to survive. These are classic signs of Stagflation — slow
growth and rising inflation.
Ok! Hold the phone.
Let’s revisit investing 101.
Firstly: Don’t panic! When it look like the World is about to
end things somehow miraculously take a turn for the better.
The contrarian way!
Secondly: There are some bright areas within the economy
namely Technology. The big companies are undertaking a new
round of tech spending and gearing up for the next round of
growth. Microsoft (below) has recently broken above a 7-year
consolidation and Oracle is reporting bumper profits.
Chart 1 - Microsoft moving above a 7-year consolidation
It’s hard to imagine a deep recession when major Tech counters
are making 7 year highs!
Thirdly: Housing Stocks have stopped making new lows. Granted
this could change by the time you’re reading this, but for now
the lows hold. Considering that all this mess has been caused
by a housing bust, this is no small feat.
So when will the pain end??
The Gold Stocks and the Stock Market will recover when the
Dollar stops rallying. And when will that be?
Chart 2 - Stronger Dollar (top) = lower $HUI (blue) and S&P
(red)
It is clear from the above chart that a stronger Dollar (top)
is causing Gold Stocks (blue) and the S&P (red) to fall. We
consider the current rally in the Dollar to be a short term
affair because our long-term target of 65 was never met. Thus
the current Dollar rally should end around 79 – 80.
Gold Stocks and the S&P should perk up in early January as the
US Dollar nears its short-term top, offering investors a great
opportunity to pick up deeply oversold and undervalued
juniors!
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