DAILY REPORT (11/21/08)
It seems that people feel very little in today's world. Companies certainly don't feel anything for their employees, and it wasn't always that way. If business contracts, the first ones to go are those that perform the menial tasks, and they are the ones least responsible for the problems the company faces. Last year we entered a credit crisis in July and things contracted throughout the rest of the year. The CEO of Citibank still received tens of millions of dollars in bonuses, while the company fired lower level employees. If anyone was in a position to know what was going on, it was the CEO. He put the bank in the position it currently faces. Recently, Citibank fired 50,000 workers in further efforts to cut costs. Now here's my question: if I can fire these people and life still goes on, what were they doing there in the first place? I suspect there is no answer for that question.
Sometimes I make references to my grandfather and I suppose it's because he was my role model growing up. He came over from Italy just after WWI with a small suitcase, no money, he couldn't read or write, and he couldn't speak a word of English. He started working in a coal mine for 10 cents an hour, and with some brains and very little capital, he built a business worth millions of dollars. He went through the Depression, WWII, and numerous recessions, and he never laid off an employee. Do you know what he did when things got tough? He worked harder and he cut back, so he didn't have to lay anyone off. Hell, it would never have occurred to him to hire someone in the first place if that person couldn't make a lasting contribution! I could be wrong, but I think the world could use a little bit more of that old-fashioned mentality.
Employees feel little or nothing for the company they work for, just like employers feel nothing for their employees. Unfortunately it doesn't stop there. It seems we go through life avoiding feelings and that explains the high divorce rates, children with guns in schools, and a whole host of other problems that plague today's society. I guess we need reality TV in order to feel something, or an X-box. Beating Tiger Woods on some video game is a hell of a lot easier than going out and digging a good golf swing out of the ground over twenty years, and then taking on the field at the US Open. Yet people react to the "virtual victory" as if they've accomplished something important in life. It seems like we have confused "entertainment" with real life accomplishments, and that will prove to be a problem in the near future. You can't turn life off like you do a computer.
Before I turn my attention to gold, I would like to follow up on a comment I made about Lehman Brothers last night. I said that I had some clients that had accounts with them and came up empty, and many of you don't understand how that could be. Lehman Brothers issued their own securities and some of them were labeled "100% capital guaranteed" by Lehman themselves. Here in Latin America Lehman had quite a presence, so much so, that you needed US $1 million to open an account or they wouldn't give you the time of day. Folks here gobbled up these types of fixed interest securities and now they are worth zero! Lehman generated trillions of dollars of bonds and derivatives, and now no one stands on the other side. You and I will end up with the bill from that.
Now with respect to gold, I must admit that I am extremely bullish the yellow metal at this point in time. More so than I have been in a long, long time and I do not think my enthusiasm is misplaced. I have been following gold for nine years and buying gold since early 2002. I do so, not out of any emotional attachment, but rather because my technical analysis tells me that gold is going to rally up to US $3,000 by 2012 or 2013. I have expounded that belief for six years, as most of you are painfully aware. The funny thing is that as gold goes higher, the harder it is to convince anyone that it should be bought. Everyone loves to call a top to the bull market in gold and yet the top is not even close to materializing. Until March of this
year, the ride had been relatively smooth as we rallied from the 2001 low of US $252.50 to the March 2008 high of US $1,033.90. You can see the move up in gold's historical chart posted above. The biggest correction was a measly 25% and that made investors greedy and complacent, a deadly combination when placing money in any market. In March the markets took it upon itself to humble investors and remind them just who was boss.
Then comes the inevitable correction. Gold fell from the 1,033.90 high, all the way down to the 681.00 low posted just last month, and that is a 45% retracement of the entire bull market. A significant correction to say the least! Immediately after the 681.00 bottom was posted the gold price moved back up over 700.00 and began to build a base, most of which has occurred close to the 38.1% retracement level at 735.80. As you can see below in the daily chart, a range has been established that reaches from the
720.20 support on up to the 760.60 resistance. You can also see that price is being compressed into a tighter and tighter trading range and in a bull market the odds favor an upside breakout.
Currently the December gold futures contract is moving toward the top of the range trading up 13.70 at 749.70. It is rallying in spite of a good rally in the dollar and bond market, and in spite of the fact that almost all other commodities are down in negative territory. I am looking for a move and a
close above the important 772.70 level. Once that happens then I think gold will move back up to tackle the old all-time high at 850.00 yet again. For the first time in a long time the P & F chart for gold has a bullish price
target of 825 and although it may not seem like much, it is a step in the right direction.
In conclusion, we are suffering from significant deflationary pressures where everything loses value. When that happens, folks tend to search out a real store of value and that would be gold. The yellow metal is the world's oldest store of value. Other countries have a long history of this and Americans will follow suit. I have no doubt that the US government will try to outlaw gold at some point in time, just like they did back in 1932. They will also implement other measures in an effort to pacify Americans, but sooner or later they'll catch on and that is when the real trouble begins. Social unrest and civil disobedience will come to the surface as people look for their rights, they so carelessly gave up. A struggle for power will ensue.
[Right now at 4:00 pm EST the stock market is on the verge of collapse as the Dow is down another 435 points at 7,566 and within shouting distance of strong Fibonacci support at 7,470. With all the losses, we still do not have capitulation and that is scary! If we move and close below 7,470 and then the 2002 closing low of 7,286 there will be another sharp move to the downside. Citibank dropped 30% today and Ford is trading at $1.23! GE is trading at $12 and they still can't price their losses. Yet again the Dow made a new closing low and it was confirmed by the Transports as well as every major index. Paulson, Greenspan, and Bush are responsible and should go to jail.]
ebo@dtanalysis.com
Dow Theory Analysis SAC
November 20, 2008
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