February Market Strategy - Gold and Gold Shares
"There is a crisis of confidence -- and I don't know what can change it"
-- Sylvia Whadwa on the DAX -- CNBC Frankfurt
Sylvia in her usual solid and no-nonsense, direct way -- tells it like it is -- from CNBC Frankfurt.
In recent months, much attention has been given to U.S. markets and their impact on the rest of the world. Little attention has been given to the seriousness of the situation in Europe as well, especially Germany.
The Xetra DAX peaked at 8064 in March 2000 and was trading at 2633 today -- down 67.3% -- and very near October 2002 lows which were at 2597. German unemployment has soared, negative earnings reports and other economic data show that the third biggest economic powerhouse in the world is likely to go into an extended recession and perhaps depression as global deflation prevents turnaround. The problem with deflation is that it is usually accompanied by bankruptcies, declining confidence. The brave days of regular new IPOs [Initial Public Offerings], venture capital miracles, tech inspired productivity and growth, growth, growth -- are but a happy memory.
So how far down and how long? We could go into a long discussion on cycle ifs and buts and maybes and wherefores and we could talk about many potential event driven scenarios for the next two or three years.
That's not necessary though. Markets are driven by confidence and lack of confidence -- not by fear and greed as common wisdom pouts. Philosophers debate whether confidence comes from economic performance, or whether markets are primarily event driven. That's like asking whether confidence comes from physical, mental or spiritual influences.
Yet, although that discussion is interesting, there is also no need to get into this in order to decide on investment strategy. A clear trend is much more useful.
The trend evidence for the Xetra DAX, Paris- CAC and FTSE 100 is pretty consistent. There is still more downside, then sideways-side!, then rallies, then downside again, then more sideways- side and only after that, potential for basing and consolidation to build into long-term upward trend development.
History shows us that this process can take several years or many years. Unfortunately, we don't have that much historical precedent to rely on. The period after 1929 is instructive and although not necessarily an accurate predictor of how long the process will take now -- nor how deep the declines will be -- that experience, in combination with the huge steps taken in cycle research in recent years -- gives useful pointers.
This is not just a temporary bear market and not just the typical recession that comes along every eight to twelve years. This is big stuff. Since 1999, I have been talking about the impact that long-term cycles such as the 55 year and 72 year cycles can have on global markets.
For the last three years, the Xetra DAX, Europe, Japan and Wall Street have been delivering pretty convincing evidence that long-term cycle pressures are being felt and are still to be felt.
Major up-and-down swings in any year of a bear are typical -- but don't assume that the up- swings will be profitably investable or will repair the down moves quickly. The basic four-year market cycle suggests that a major low may be as soon as June 2004. After that, perhaps an investable rally for another three to five years -- yet scope on various cycle arguments favours stagnancy and sideways work for anything between four and ten years from now.
I believe that it's not too important to forecast the sequences and scale of dominance of the many cycles happening simultaneously. Even if one forecast turns out to be right, it can only be confirmed after the event.
What is important to investment strategy, is to recognise that it's not worth fighting the long-term bear cycles with a ride-it- out approach. These growlers take e.g. 8 years or 12 years or 25 years or 55 years or 72 years or arguably 144 years or 300 years to fuel their impact -- depending on the time scale of evidence relied on. In the first few years of the long-term bear, it's like yelling at a tidal wave if you persist with investing in "value" based on the paradigms and assumptions for expected earnings growth -- which worked quite well for a few years in the previous cycle.
To illustrate the difficulties, it took from 1932's DJIA lows to November 1954 to reach the peak levels of 1929. And it took from 1932 to 1950 to recover half the declines which happened from 1929 to 1932.
The Xetra DAX German stock market declines of 2000 and 2001 were excellent predictors for 2002 and beyond. I notice that on 3rd September 2001, when the Xetra DAX was at 5162, I forecast the long-term bear underway -- with scope for the downside to between to 2240 and 1950. Now at 2632.
Our behavioural count system that endeavours often quite successfully to forecast medium and long-term reversal candidates, based on measures of price action relative to weekly and monthly unfolding expectations. The counts now suggest scope for the Xetra DAX to work still lower than 1950. One count highlights 1582 or below. The process may still take several years - or the base then stagnancy can turn out to be near 1950.
Whichever scenario happens, what the counts are telling global investors to do -- is not to try and ride out this bear market. Cash will be king as even better value opportunities develop in coming years. And along the way, decide on a strategy for bear markets e.g. investing in a well-managed hedge fund which can make money in up and down markets and in trending sectors.
Stay clear of the financial sector, however loudly the horn- rimmed clever- sounding analysts tell you about "value". There'll be a further shift from paper assets into hard assets as deflation and slowing growth begin to be appreciated.
"We are overweight in insurance but are staying with it because valuations are attractive if markets stabilise," says a CNBC commentator. Notwithstanding a clear down trend. Interesting choice of words -- the 'if markets stabilise' bit.
Other than special situations requiring expert stock and price level selection -- stay clear of most industrials and financials until the markets show technical potential corroborating fundamental potential for investable pushes.
Resources, especially golds, will do the best -- but it is too soon to be investing in most non- gold resources counters. After the G-7 countries do more interest rate cutting attempts to reflate, thereby building an eventual inflationary incendiary -- resources share prices will be reflecting basing behaviour and upward trend potential. First a corrective leg down though [have a look at the 55% rise the CRB index has done since 1999 -- it anticipated what is coming -- now technically ripe for a few months of pullback].
GOLD and GOLD shares are early in a long term bull market and are busy corroborating technical and fundamental and cyclical upward trend potential. The next phase of the upside breakout confirmed as the $Gold price today penetrated $372, trading at $382 as I write. Some resistance at $396, but really very little until $417, perhaps before end March.
$Gold is in the rare super trend I have been talking about, which accelerates despite the hope and expectation of would- be buyers that they can buy lower when a dip comes. But the dip does not come, because too many people are hoping for a dip.
That is one of the reasons why gold shares are not yet performing. Both sceptics and gold bulls hope to have an opportunity to buy lower down.
In South Africa, the Rand strengthens as the Gold price runs -- but when the Rand meets resistance -- or the $Gold price doesn't pause at $400 -- the fireworks will start. Our behavioural counts show scope for $Gold at $491 and above in the next 18 months and many of the shares 30% -40% + higher in under year.
Short positions on golds are already being forced to cover and close [buy back shares shorted or buy back physical gold shorted through futures or leases or swaps]. But again, I don't think the real panic will start until those who are happily waiting for the $Gold price to dip -- begin to realise that it won' t. The belief is still prevalent that the stronger $Gold prices are mainly due to currency factors and war fears. The belief is that after the US goes into Iraq -- the Gold price will collapse and the US$ will recover. Sorry, the war is not the most important issue.
I've talked about this at length before -- but the bottom line is that central bankers and bullion dealers and some large gold mines have for years been assuming that the price of gold will stay stagnant or go lower and that the US$ and other paper investments such as Wall Street and US Treasury Bonds will outperform. Those bankers, dealers and mines have shorted gold, leased it out, swapped it and have sold it through derivatives for more gearing -- and now they have a problem -- because the mines cannot increase output quickly -- and central bank sellers are now central bank buyers.
All assumptions about a strong US$ and Wall Street are having to be reassessed -- and traders are beginning to realise the squeeze that will happen to the Gold price, not only to $417 resistance, but to well above $500 in the next year or so -- if the US$, US bonds and Wall Street are dumped any faster than is already happening. Demand exceeds supply and demand will increase as a combination of US$ weakness and asset shifts accelerate. It is as simple and fundamental as that.
The US is particularly vulnerable right now -- private, corporate and public debt at record levels -- anti- American feeling is high -- and much of the Muslim world and Asia must be keen to disinvest to the extent they have not already done so. The average American is a consumer, not a producer of hard goods. In the last few days, Japan has been a huge net buyer of physical gold, gold futures and gold shares -- traders say as a hedge against a weaker US$.
Whatever is driving this push, watch the Gold Rush that is developing. Private investors, fund managers, institutions will be scrabbling over each other to avoid missing the boat -- or at least to avoid being criticised for completely missing the boat. They will only wake up somewhere near $400.
It will take at least a few days of damage to momentum by action below $372 or to below weekly lows -- to indicate intense profit taking underway. Buy any dips.
For signals on gold share and other opportunities at the JSE, North American and European markets, selections, trading strategy, information on relative strength, trends, timing and price targets -- have a look at our web site.
Our empathy goes to the USA for the recent space shuttle tragedy. America will recover from its problems -- they have the spirit.
7 February 2003
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