On Track for Lift Off
Greg Silberman CA(SA), CFA (Retired)
I grew up in Apartheid South Africa.
Yes, I did see things I wish I could forget.
If I've learnt one thing in life it's not to take anything for granted and to analyse your lessons carefully (wherever they come from). Ok, that's really 2 things.
Here's the deal:
At school we used to have lessons on how to identify bombs in shopping centres.
For many years we lived under a state of emergency. Police used their vast powers to terrorise the population. No, those blunt powers were never aimed at me personally. Nevertheless, we lived with the threat of the State Apparatus taking a closer 'look' at you.
I was in Soweto the night Nelson Mandela was inaugurated as president. It was a night to remember. The country heaved a palpable sigh of relief.
Thereafter reality set in and the hard work took over.
I have always maintained that the World would become more like South Africa than South Africa like the World. As far as I'm concerned, South Africa is the canary in the cage.
Apartheid is being instituted around the world (not in name of course). Nations discriminate against nations. Races against Races. I don't agree with it but having grown up under Apartheid I can honestly tell you that the way the world is heading feels eerily familiar to me.
Under Apartheid, the Power of an Individual gets completely usurped by the State. It's not hard to see the USA and Western Civilization are heading in that direction at a rapid pace.
If SA is a canary in the Coal Mine, it's probably worth taking a second look at what's going there. That said, I'm asking myself, what's up with the Rand?
I remember the first time I travelled to the US. It was 1985 and I was thirteen years old. If memory serves correct the exchange rate was R2:$1.
When I left South Africa for England in 1998 the exchange rate was R5.50:$1 and I was happy at the prospect of earning 'hard' currency.
Before moving to the United States I visited South Africa and found the Rand had collapsed to R13:$1. You could buy a 5 bedroom house in Johannesburg for around $23,000. My biggest regret is not having done so.
By 2005 the Rand had recovered to about R6.10:$1 and property prices had gone berserk. The same house could be sold for $160,000! Oh well, can't win 'em all.
But what's this?
The Rand looks like it has broken out of a large head and shoulders pattern and is heading to the upper 7's (scale is inverted).
Chart 1 - Rand breaking down from H&S
As the Gold Price has stabilized around $550, the weakness in the Rand has given the Rand Gold price a major boost.
So what?
That's great you say. Good for South African miners (maybe you have a few in your portfolio).
Remember the Canary?
Taking a look at the next chart you will see that the previous major advance in Gold shares began with the South African miners.
Chart 2 - SA Golds (HMY) peak long before N.American Golds (HUI)
Harmony Gold (dashed blue line) is one of the biggest Gold Miners in South Africa. During the first wave of the Gold Bull market, Harmony surged ahead of its North American counterparts (Rand Weakness) and peaked in early 2002. Nearly 2 years in advance of the HUI.
Current Outlook: A sustained move by HMY above $18 and the Canary has left the cage. The rest of the Gold Universe will follow in time.
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The mystery behind the 10 Year Bond??
With commodities off the boil, global stock markets down, housing getting soft and leading economic indicators turning down one would be expecting a global slowdown.
No area is more sensitive to a slowdown than Long Term Bonds. The reason, rates fall in a slowdown to 'induce' borrowing and stimulate economic activity.
Sometimes price action doesn't confirm 'popular' belief now is such a time. All indications are that the long bond has more downside ahead (rising yields). Let's take a look:
Chart 3 - 10 Year Bond Price vs. Centex Homebuilding stock (below)
First ominous sign: the MACD (top) recovered from April's oversold conditions during the May rally. It has now turned down again.
Second VERY ominous sign: A break below the previous low at 105.31 would signal the next leg down. NEWSFLASH: Price has subsequently moved below that level to 104.12. The target is now 102.5 or 5.5% on the 10 year bond.
Third ominous sign:
Homebuilding stocks (I have used Centex as a proxy) have been keying closely off rates. Notice how the slide in Centex has coincided with the slide in bond prices (green box). Then notice how Centex stabilised when Bond prices rallied (blue box). I forecast that the latest breakdown in bonds will shave off another 20% on the price of Centex.
10-Year Bond Mystery Resolved
What we are witnessing is a CREDIT CRUNCH!
Here's a definition of a credit crunch:
"A shortage of available loans. In well-functioning markets, this would simply mean a rise in interest rates, but in practice it often means that some borrowers cannot get loans at all, a situation of credit rationing. "
Source: Deardorff's Glossary of International Economics
The scariest part:
Kondratieff Wave Analysis predicts a spike in interest rates at this stage of the cycle (Winter). Per K-Wave, what follows is MASSIVE liquidation and a collapse in stocks and real-estate!
The prescription:
Get out of Debt. Get into Cash. Get into Gold.
More commentary and individual stock picks follow for subscribers…
Greg Silberman CA(SA), CFA (Retired)
goldandoil@yahoo.com
July 5, 2006
I am a private investor in the resource sector.
Please visit my blog for more free articles and analysis
Click here: http://goldandoil.blogspot.com
This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
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