New Year's rally for suckers, hold onto gold!
Posted on 03 January 2009 with no comments from readersOrder my book online from this link
You have to imagine the hedge fund professionals playing it cool yesterday while the Dow rallied by 2.9 per cent on the first day of the New Year. Only they know the size of redemptions that they need to fulfill after the rush to the exit at the end of last year.
So allowing the optimists who drank too much at New Year to buy a few stocks and improve the liquidation prospects is just a good trading strategy. The numbers still look awful and the Dow is way too high given the outlook for losses. But is this rally a few days or a few months, that is harder to tell.
Cash still king
Indeed, the sensible investor has sold and is hoarding cash. Indeed, that is a problem for the Fed and its stimulus plans. Until people can see a real upside they are likely to both hold onto cash and take cheap money and sit on it, ditto the banks.
If you are looking for green shoots of recovery there are few in sight. Lower commodity prices, particularly oil, and some improvement to the credit markets provides a glimmer of hope but the downturn in the global trade cycle looks awesome for 2009. Besides Middle East instability and the Gaza War could send oil prices back up.
Sucker’s rally
No I am afraid any rally in stock prices will prove a sucker’s rally – and it will not be long before something happens to trigger the inevitable sell-off by the hedge funds for their redemptions, and once that starts it will be quite a big down leg.
Will that also be bad for gold and silver? That was the lesson of 2008 but confidence in the dollar is beginning to wane with the size of bailouts and stimulus packages and the implications for the bond market.
It would be unwise to place too much faith in the greenback, and better to at least hedge with precious metals. The rush from the dollar to gold could be very quick if history is any guide.
no Comments posted by readers:
Thanks for your articles, Peter, I’ve recently begun following and appreciating your perspective. Given your views of precious metals, which I share, and given the precious mining shares collapse in 2008, would you agree that mining stocks will be reasonably immune to any continued market crash from this point forward. Even if the general market is now seeing a sucker’s rally, my own intuition whispers that the autumn 2008 mining share lows were not merely intermediate bottoms but actual bottoms, as the secular gold and silver bulls continue their run. Your article does not differentiate between them two, and I’d be curious to know how you think about this.
Marc Faber is tipping gold stocks and especially the explorers in his latest newsletter, and I think that tends to suggest you are right – stronger bullion prices might also come now which would help support these shares against the renewed downtrend. Marc Faber usually wins – I have given up trying to argue against his views!
Also from Marc Faber’s latest newsletter, he compares 1974 and 1987 stock market crashes and the rallies that followed. In both cases stocks were far less over-valued than they are today, which makes a strong, durable rally less likely. But he makes the point that the commodities boom since 2000 is similar in pattern to 74 and 87, and that the crash in commodities prices looks an overdone correction in a long-term boom that should resume soon. That would be good for oil and gold, and make the Middle East financial crisis of short duration.
“If someone really felt that the similarities between the 1974 low and the current market conditions are overwhelming,” writes long-time gold bull Dr. Marc Faber in his latest Doom, Gloom & Boom Report, “he should consider Buying Gold and oil rather than US equities (and also shorting US bonds).
“Gold corrected between the end of 1974 and the summer of 1976 by 40%, while the stock market surged. But from its August 1976 low, Gold Increased Eight-Fold.”