Lost in all the election and Fed hoopla are the problems in Ireland. The yield on Irish debt is surging and the share price for Bank of Ireland stock is plummeting. Ireland, like it or not, is going the way of Greece. As of Friday the yield for Irish debt stands at close to 8% and that's about 2.5% more than you would pay for a home loan in the United States. With respect to the Bank of Ireland shares lost almost 15% of their value on Friday and, as you can see below, and the share price has been cut in half over the last two months:
You can see the complete breakdown on Friday in spite of the fact that the stock is extremely oversold. Without a doubt the European Central Bank will be digging into its pockets and doling out more liquidity in an effort to prop up the country.
Investments today are all about the search for value and security, or at least they should be. That's why the Swiss Franc continues to rally regardless of what goes on in the US and the rest of the world. If you
were paying attention you would have seen the Franc rally against the dollar on Tuesday, Wednesday and Thursday as the dollar plummeted, and then post a minor gain on Friday even though that same US dollar surged against all other currencies. Most people know little or nothing about Switzerland and fail to realize that it has been a financial safe haven for well over one hundred years. The preceding chart of the Franc looks very strong with RSI, MACD and the histogram all headed higher and yet the Franc is not over bought.
If the US economy is on the mend as everyone seems to think, then tell me why gold, silver and the Swiss Franc all continue to churn higher? Why is the Fed going to print another US $600 billion if things are getting better? How come unemployment continues at 9.6% if things have been getting better for more than a year as the government claims? If things are getting better how come Americans refuse to consume and are increasing their savings rate? The per capita savings rate has increased from 0% to 6.5% over the last two years while consumption continues to decline. That's not a vote of confidence for the policies of this administration.
Since the US government is unable to bring down the unemployment rate they have developed a new mantra, increase exports! President Obama announced that he wants to double US exports over the next five years. This fits well with the commentary that we're hearing with respect to a cheaper dollar leading to an improved balance of trade. Everyone seems to overlook the fact that the dollar has been declining for ten years and yet America's trade balance continues to deteriorate. The President is now in India trying to win some concessions for lower tariffs on US goods. Personally I think he is laying the groundwork for a trade war designed to unite the US population behind a common cause and against a common enemy. That will draw attention away from problems at home and transfer blame away from the President. This has been tried before on countless occasions, almost always out of desperation, and it never works.
Nowhere is the administration's poor policy selection more visible than in the preceding daily chart of the US Dollar Index. We spent the better part of this year developing a head-and-shoulders formation only to see the neckline violated in September. That neckline corresponded nicely to the old historical low at 80.16, and once broken the greenback fell rapidly to test strong Fibonacci support at 76.98. That particular Fibonacci support was broken for the second time in three weeks on Tuesday, and in spite of Friday's rally the Index closed out the week at 76.57. From here there is no real support until the dollar hits 75.01 and then the 2009 low of 74.23. Right now the dollar is not oversold and we see mixed signals with the RSI turning up while the histogram and MACD are headed lower.
You have to go back to mid-August before you see a correction that runs more than four sessions and I see that pattern continuing this month. You may see a move higher for another day or two but the trend lower will in my opinion continue leading to a test of 75.01 within a week or so and finally a test of the all-time low at 70.70 in late December or early January. The reason for the decline is really quite simple: growing supply is overwhelming a shrinking demand and with the Fed's declaration regarding another round of quantitative easing, the downward pressure will only increase. Countries like China and India are not at all happy with the Fed's decision and that discontent will only speed their exit from US dollar denominated assets. That's why in 2011 we'll see a much lower all-time low in the US dollar along with a declining standard of living for the large majority of Americans.
With less people wanting US dollar denominated assets, the Fed will be pushed into the role of buyer of last resort when it comes to US debt. That will put downward pressure on bonds and I believe we are
seeing the beginning of that downward pressure now. I believe that bonds topped in late 2008 ending a twenty-five year bull market. Once the top was in, we saw an initial decline down to strong support at the 112.08 area followed by a bear market rally back up to form a significant lower high at 136.84 in August. This lower high came in just above strong resistance at 135.22 representing a 75% retracement of the initial bear market decline. The August lower high has now been followed by a series of two lower highs and two lower lows as the bonds trend down to a test of strong support at the 127.98 level. Furthermore the RSI, MACD and the 50-dma are all pointing downward and are signs of increased technical deterioration.
It is my opinion that the Fed is putting itself into a box by announcing that it will buy US $75 billion of US debt every month. Foreigners will line up at the window in an effort to dump dollar denominated assets and crowd out any other potential sellers. Without a doubt the Fed has to be aware of this and either doesn't care or feels it doesn't have any other choice. I believe the Fed has made a conscious decision to sacrifice the US dollar and, in the process, inflate away US debt. This will force the Feb to print more and more money in order to monetize US debt (old and new) and that will also drive the bond lower and raise interest rates at just the wrong time. Foreigners aren't stupid and will eventual dump their debt at any price and that will send ripples through all financial markets. In short there is no good end for a country that wants to continually live beyond its means.
I knew for years that the dollar would tumble but I always thought that stocks and not bonds would be the next shoe to fall. The events that transpired this week in the stock market indicate to me that I am more than likely wrong. Stocks continue to float higher on a sea of fiat currency even though they are extremely overvalued and pay an historically low dividend yield. This week the Dow finally powered through strong resistance at 11,245 and closed out Friday's session at
11,444 for a gain of 326 points over the last five sessions. The trend is clearly higher and the question remains how high is high. The Dow is extremely overbought but as we've seen with gold, things can stay overbought for a long time. The Dow has no real resistance now until it hits 12,266 and that isn't all that far way.
Depending in what source you use the current price earnings ratio for the Dow is around 20 and the average yield is 2.30% indicating an absence of value for the investor. That means money going into the Dow is based on the greater fool concept whereby I depend on someone dumber than I am to pay more for my stock than I did. That's I game I know nothing about and I don't want to learn. I do know that the Dow must eventually follow in the footsteps of the dollar and the bond; the only thing I don't know is the "when". Bonds recovered slightly more than 75% of their initial bear market decline while the US dollar could only recover 38.1% of its bear market losses. If the Dow were to follow in the footsteps of the bonds, a 75% recovery would take it up to 12,266. Even though I believe the Dow will march higher, I am not a buyer. Also, I will refrain from picking a top until I have clear evidence that a top is in.
So what do you do to make money if you're not investing in stocks? The average investor will not short the dollar or the bonds, assuming that it's too risky, so that only leaves gold and commodities as available alternatives. I have been long gold for a decade, gold has been moving higher for a decade, and yet almost no one knows about it. Compare that to the tech bubble when everyone believed the NASDAQ would go to 10,000 or the housing bubble when the majority of Americans believed that the only thing better than having mortgages on two houses was going into debt on a third house. By comparison gold is the ugly girl sitting in the corner at the dance that no one wants to talk to. That will change.
As you can see in the preceding chart, gold has enjoyed a strong, consistent move higher since the October 2008 low of 681.00. This is in spite on monumental efforts on the part of central banks and bullion banks to manipulate the price of both gold and silver. A rising gold price is a clear threat to the implied authority of central banks as it cheapens their respective fiat currencies in real terms. Almost no one recommended gold over the last ten years of its bull market and now they're saying it's in a bubble. I contend that gold is still a long ways from a bubble and will not reach bubble status until the general public piles onto the gold train. To date there are no signs of such behavior. How does gold react to all the pressures and negative commentary? It simply grinds higher as does its poor cousin silver. On Friday the spot gold closed up 1.20 at 1,393.50, a new all-time closing high, while silver closed up 42 cents at a new bull market high of 26.72.
Thursday and Friday saw consecutive closes above what had been strong Fibonacci resistance at 1,372.80 for the first time and put to rest the fears that gold had topped three weeks ago. Observe that gold is not yet extremely overbought and that the RSI, MACD and histogram are all pointed upward and the histogram just recently turned positive. Also you have the 50-dma and the 200-dma averages headed higher, and when you add it all up you realize that gold will now test the next level of resistance at 1,447.50 before we see any kind of decent reaction. Can gold move beyond 1,447.50? The answer of course is that anything is possible. We see wild projections calling for 2,000.00 or 3,000.00 gold on this move up and that is usually a sign that things are about to overheat. I do not see 2,000.00 gold on this leg up unless something goes drastically wrong. As you can see in
this Pont & Figure chart there is a 1,520.00 bullish price target for the yellow metal. I would guess that this move will run out of steam somewhere between 1,447.50 and 1,520.00 with a maximum range for a top at 1,596.80.
As good as gold looks, silver looks even better at it jumped almost 9.2% in just three sessions. Friday's close at 26.72 takes the white metal above what should have been strong resistance at 26.48 and it
has nothing in its path until it hits 31.91 although the Point & Figure chart (not shown) sports a bullish price target of 29.00 and that would be my best guess for an exhaustion point. Note that unlike gold, silver is now extremely overbought but as I said before, it can stay that way for a long, long time. Actually I think silver is finally getting some impetus from short covering as perma-bears who shorted silver forever are finally being forced to capitulate.
Everybody is hot for commodities now and that is a decent play, but if you look at the chart of the CRB Index you see that it has yet to break out above the 2008 high of 615.04 whereas gold and silver crossed that bridge a long time ago. Gold and silver offer the most bang for the buck and they are money! There are places to exchange gold and silver coins in almost every corner of the world. Try doing that with a bushel of corn. I have been in and out of cotton, sugar, corn and copper with some success, but none of them offer me the comfort level that gold/silver provides me. I will continue to "trade" commodities when I think I see an opportunity but I will buy and hold gold and silver, and that is a big difference.
In conclusion, the problem as I see it is that government is everywhere and it continues to expand. It is in health care, insurance, education, the auto industry and banking. Obama wants to grow government even more as he forms new layers on top of old layers of bureaucracy while at the same time limiting your personal freedom. Additionally, you have a government that is privatizing gains for the benefit of the few and socializing losses to the detriment of the many. The US just had a mid-term election that will in my opinion change nothing and you're headed for a trade war under the guise of increasing US exports. Everyone seems to have forgotten that you first must produce something that the rest of the world wants before you can export. Germany's figured that out and so has China, but the US has yet to receive the message. The falling dollar is eating away at the average American's standard of living and he doesn't know what to do about it. Obama doesn't offer a real solution and neither do the Republicans.
The only solution I see is to buy gold and hold Swiss Francs for folding money. The average American knows he's in trouble but feels restricted financially, geographically and even legally as his rights are being quietly stripped away. The foreclosure scandal is just one example of the great lengths used by Wall Street to defraud Americans. We've seen violence in Greece and France and I believe we'll see violence in the US as discontent spills over onto the streets. I'm talking about people you know, neighbors openly expressing their dissatisfaction with their government. That's when gold will explode and stock prices will collapse. These are people who were duped into believing that they would enjoy a free lunch and will now be forced to pay for thirty years worth of free lunches. Disappointment and uncertain will be turned into anger and it will express itself.
November 07, 2010