HUI - Preparing For Launch Soon
(Part III)
Eric Hommelberg
March 25, 2007
Finally the HUI caught some fire last week after the FED's decision to leave interest rates unchanged. It did run up by 10 pts on Wednesday March 21 and finally the gold shares are showing some strength since they refused to surrender their earlier week gains despite a $7 drop in gold last Friday.
The $7 drop in gold certainly raised some eyebrows since it did so in the face of increasing inflation exactions (due to the FED's decision to leave interest rates unchanged) and 15 UK soldiers being captured by Iran. This latest event certainly isn't a geopolitical friendly event and sure enough one would have expected gold to rise on such news since gold ought to behave as a safe heaven in times of geopolitical stress.
As explained last week in my piece 'HUI - preparing for Launch soon - part II'
the financial powers don't want you to believe in gold as a safe heaven since the last thing they want is a sharp rise in the prise of gold in the face of a potential financial/geopolitical crisis.
So gold going down on gold bullish news, well, it's a pattern we've seen over and over again but the thing is that no one can stop or reverse a primary trend. Gold's primary trend is pointing upwards, not downwards, the fundamentals are so extremely bullish that gold's downward risk from here on is almost non-existent.
As explained last week the Fed and CB's must act and add liquidity fast in order to avoid a serious fallout from the subprime issues. Sure enough this is all dollar bearish and therefore gold bullish.
The dollar has not a snowball's chance in hell in order to gain substantially thereby locking in gold's downside potential from here to almost zero. The US is running an ever increasing current account deficit which simply means that in order to sustain the dollar at current levels an inflow to the tune of $3 billion dollars is required each single working day. You really think the current administration cares a bit? You really think they will try to balance their budgets? Any idea how they are going to finance the Iraq war which costs are estimated to exceed the 2 trillion dollar mark over time?
Now let's visualize the ever increasing US debt position first:
As you can see here total US debt is growing faster than its national income. Ever tried to run a business which its debt grows faster than its income? Well, needless to say you would be heading straight into bankruptcy.
Is that what worries major dollar holding nations? Is that why they're looking for dollar alternatives? How is the US going to solve its debt problem? Can they solve it? Or is it already too late? Well, serious questions indeed and you may wonder why authorities have chosen the path of denial and continue to present an 'all is well' good news show. Or maybe the authorities are telling the truth and the picture painted above is extremely exaggerated to the down-side. Well, facts are facts and the simple fact is that the US is addicted to an inflow of foreign capital to the tune of $3 billion dollars each single working day and when that foreign support stops the US$ is in deep trouble.
Now let's take a peek of some serious expert warnings surfacing last year regarding a potential dollar crisis:
Experts warn for potential dollar crisis:
According to Prof. Laurence Kotlikoff (a former senior economist at the President's Council of Economic Advisors (CEA) during the first Reagan administration) the US is heading towards bankruptcy indeed. Kotlikoff was quoted last year by the Daily Telegraph:
"A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve.
Prof Kotlikoff said that, by some measures, the US is already bankrupt. "To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors," he asked. According to his central analysis, "the US government is, indeed,bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds''. END.
You don't have to be a rocket-scientist in order to understand that a world reserve currency backed by a country heading into bankruptcy won't generate that much confidence therefore a massive exodus out of the dollar can be expected coming years and is in fact already taking place, a fact even former FED chief Alan Greenspan acknowledged last year:
WASHINGTON (Reuters) - Former Federal Reserve Chairman Alan Greenspan said on Thursday that both private investors and central banks were shifting away from the U.S. dollar and toward the euro. "We're beginning to see some move from the dollar to the euro, both from the private sector ... but also from monetary authorities and central banks," Greenspan told a conference sponsored by the Commercial Finance Association. END.
Now shifting away from dollars toward euros isn't really a dollar bullish development, in other words, the dollar seems to be heading lower, a view which is shared by China's deputy central bank chief who warned last year:
China Raises Red Flag On Dollar
"The exchange rate of the U.S. dollar, which is the major reserve currency, is going lower, increasing the depreciation risk for East Asian reserve assets," wrote Wu Xiaoling, deputy governor of the People's Bank of China, in an academic paper. Wu is ranked by Forbes as the 35th most powerful woman in the world. END.
Some democratic lawmakers warned for a financial crisis as well by end of last year:
WASHINGTON -- Democratic lawmakers warned on Thursday that U.S. reliance on foreign countries to purchase U.S. debt could lead to a financial crisis as they faulted the Bush administration's economic stewardship.
"If the United States does not begin to take steps to reduce its unsustainable dependence on foreign borrowing in an orderly way, there could be a run on the dollar that could precipitate an international finance crisis and a sharp increase in interest rates," a report issued by Democrats on the congressional Joint Economic Committee and House of Representatives Financial Services Committee said. END.
Former FED chief Paul Volcker isn't a really dollar bull either, he warned last year (Nov 2006) for a a potential dollar crisis, he was very specific and mentioned a time frame of within two and a half years:
Reviewing the systemic case for gold investment
AME Info
So far the US has organized an orderly devaluation of the US dollar which has fallen by almost a third in value this century. However, in all market mechanisms there comes a tipping point where a trend becomes a rout - and it has to be said that expecting global creditors to continue to accept falling real debts is not sustainable.
This is why an authority as eminent as Paul Volcker forecasts a dollar crisis within the next two-and-a-half years, and why he is unwilling to extend that timeframe according to recent statements. END.
As said before the US requires an inflow of $3 billion dollars each single working day in order to maintain current dollar strength.
It's quite obvious who were the main supporters for the dollar during the last couple of years.. The chart below tells it all:
So there it is, an ever increasing amount of foreign investment is required in order to maintain current dollar levels…
But what if some major supporters just stop acquiring an ever increasing amount of dollars in order to sustain current dollar strength? Won't happen you say? Well, what about this one then:
China says it will stop accumulating FX reserves
Reuters, Tuesday, March 20, 2007
www.reuters.com/article/bondsNews/idUSN2035119120070320
GUATEMALA CITY -- China will stop stockpiling its massive foreign exchange reserves, China's central bank governor Zhou Xiaochuan said in an interview published on Tuesday.
"Many people say that foreign exchange reserves in China are (already) large enough," Zhou told the Emerging Markets magazine, whose latest issue was released at a meeting of the Inter-American Development Bank in Guatemala. END.
In the face of declining foreign dollar support, how do you think the US is going to reduce its massive current account deficit?
Well, the answer seems obvious, the dollar simply has to devalue over time:
IMF to urge further depreciation in dollar
Sat 24 Mar 2007, 12:59 GMT
BERLIN (Reuters) - The International Monetary Fund will say further depreciation by the U.S. dollar is needed to help correct global imbalances in its latest World Economic Outlook (WEO), Germany's Sueddeutsche Zeitung said on Saturday.
Quoting from a draft of the WEO, the paper said the Washington-based fund argued "extraordinarily aggressively" for a correction in exchange rates, above all so as to reduce the massive U.S. current account deficit. END.
Well, the IMF arguing for an 'extraordinary aggressive' correction in exchange rates points to lower dollar levels over time, not higher. Lower dollar levels equals higher gold levels, not lower.
The thing which should be committed to memory is that gold is in a bull market no matter what financial powers want you to believe…
So far the financial powers succeeded well in scaring off investors out of gold and gold stocks so far. Believe it or not but only less than 0.3% (vs 5% in 1980) of all invested capital has found its way in gold/goldshares these days despite the 160% appreciation since 2001. The gold shares even fared much better than that since they appreciated by a stellar 900% (average) since 2001. What does it tell you? Well, it tells you that this gold bull still has a long way to go.
Now let's turn back to gold's current situation.. Despite the recent fear out there gold is marching higher, not lower. Ever since gold's gruelling correction in May 2006 the only thing that gold has done is clocking higher bottoms, not lower..Yes, volatility has increased dramatically this year but remember, that's all in the game, just sit tight and don't let the gold bull shake you off…
Below you'll find the updated gold and relative charts, they are all pointing towards higher gold prices, not lower.
This chart tells us that the uptrend in gold is still intact. All what gold is doing despite the recent fear out there is to clock higher bottoms, not lower.
This chart clearly demonstrates that the way is up for gold, not down. We are nowhere near 'SELL' territories as of yet, the relative gold chart just clocks higher bottoms, not lower.
This chart clearly demonstrates the extreme volatility in the gold shares, up, down, up, down etc.
Yes, the gold bull will try to shake off as many gold investors from its back before taking off. Just sit tight and do nothing at all. Also here, the HUI is clocking higher bottoms, not lower.
The GOLD/HUI ratio chart clearly says that we're nowhere near major 'SELL' terrirories as of yest. In fact the opposite is true, the GOLD/HUI ratio chart suggested being in 'BUY' territories recently. The GOLD/HUI ratio is dropping now which is a sign of strength, this was clearly being the case last Friday (March 23) when the HUI refused to give up earlier week gains despite the $7 drop in gold.
It seems the gold shares are on the verge of a renewed up-leg which could be a stunning one since the HUI is still undervalued against gold these days. More on that in next week's GOLD/HUI update.
Now how can you profit from such a new up-leg in gold and its shares? Well, sure enough you could buy into some major producers such as Newmont but the stellar returns are made by investing in juniors making a significant discovery. Last year we managed to get our readers early into Aurelian Resources thereby enjoying a gain exceeding 3000%. Just recently we notified our members on two promising juniors with true blue-sky potential. The first one is up 79% since early January, the other up 27% since March 12 and the end is nowhere in sight. Furthermore we issue 'BUY' alerts for stocks in our 'watch-list' on technical break-outs'. If you want to find out about these two promising companies and enjoy our extensive discovery news, market updates and break-out alerts then please join us today. You can do so for as little as $30 per month. Sign up info can be found HERE
Best Regards,
Eric Hommelberg
The Gold Discovery Letter/
The Gold Drivers Report
Email: ehommelberg@golddrivers.com
Web-site: www.golddrivers.com
March 25, 2007
If you want to receive these kind of Gold/HUI analysis on a regular base then you can join us HERE for as little as $30 per month.
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