Market Analysis: How to Prepare for "Economic
Depression"
Source: JT Long of
The Gold Report
(8/19/11)
http://www.theaureport.com/pub/na/10636
The week of August 15 was one of the most volatile stock
market performances in years. Negative news about the global
economy, gloomy forecasts and mixed signals on the jobs front
battered stocks and sent gold repeatedly above $1,800/ounce.
The Gold Report
asked an analyst, two newsletter writers and an economist the
following: What should be a precious metals investor's next
move?
The Gold Report:
John Williams, government economist and editor of
ShadowStats
, put it this way: "The financial markets remain unstable and the
U.S. dollar is viewed increasingly as the investment currency of
last choice. . .Any cosmetic actions taken pre-2012 election
likely only will add to the long-term inflation and
dollar-debasement problems." Considering these market conditions,
is this a buying opportunity for equities or a good time to take
refuge in gold and silver bullion as they continue their climb
north? How are you adjusting your investing positions in light of
global geopolitical and financial unrest?
Nana Sangmuah
,
Clarus Securities
analyst:
All indicators point to weakening global macro-economic framework
that has stoked the safe haven demand for the bullion. Despite
the good run so far, I expect to see some volatility going
forward and there will be some pullbacks in the near term. To
stay a winner depends on when you jumped on the bullion band
wagon. A better way to reap this upside is to move into gold
equities with production and immediate leverage to rising gold
prices. Most of these have not re-rated to the $1,500/oz. gold
price environment so pose little risk to the downside, but a lot
of upside, as they continue to report record quarterly
results.
John Kaiser
, producer of
Kaiser Research Online
:
The valuation lag for gold and silver equities relative to the
prices of gold and silver bullion reflects an embedded pessimism
about the medium- to long-term global economic outlook, which has
been exacerbated by the recent debt ceiling debacle. Private
sector deleveraging has been underway since 2008, and it now
appears that political pressures are forcing a cycle of public
sector deleveraging called "austerity." China's fiscal stimulus
response to the 2008 curtailment of consumption demand depended
on the American economy regaining traction by 2011, but it is now
clear that American fiscal stimulus efforts have been ineffectual
and China's slowing economy will not receive a boost from a
recovery in American demand. This crimps expectations that
China's growing economy will continue to incur a rising cost
structure as domestic consumption assumes a greater share of
Chinese GDP and boosts the competitiveness of American-produced
goods and expands the Chinese market for them. A slowing Chinese
economy, in turn, reduces the willingness of the private sector
to invest in American production capacity and boost employment
through manufacturing jobs. That will further encourage private
sector deleveraging and result in scaled-back consumption, in
effect putting in place an economic death spiral accelerated by
ongoing job losses at the state and local government levels as
the tax revenue base shrinks.
While the prospect of a dysfunctional global financial system
boosts demand for gold and silver prices, the arrival of a
double-dip recession possibly deteriorating into a full-blown
depression has deflationary implications that will "pop" the so
called bubble in gold and silver prices. Equities are not
tracking the short-term rise in gold and silver, which could
exceed $2,000/oz. and $50/oz. respectively, because markets are
anticipating a serious medium-term retreat in gold and silver
prices. We could see gold and silver head higher while gold and
silver equity prices head lower. The buying window would emerge
after gold and silver have spiked in the midst of "panic"
conditions, with the speculation being that current prices plus
or minus 20% are the new long-term reality for gold and silver
prices. However, for that to happen there must be signs that the
American economy is on a growth track, and that the Eurozone will
avoid disintegration. The sharp sell-off in gold and silver
prices in the medium term, which current equity prices are
discounting, would not happen if the American economy continues
its current trend of relative decline within a growing global
economy. The latter requires the United States to adopt a fiscal
stimulus program that produces assets that flow value to future
generations expected to pay off the associated debt.
The negative scenario for gold would be one where the United
States, in an effort to postpone or suspend its relative economic
decline, engineers a downturn that inflicts considerable
suffering on its citizens, but utterly demolishes emerging
economies such as China, which represents the biggest
displacement threat to the United States. The political discourse
seems to suggest that the best way for America to save itself is
to submerge itself and drown dependent economies before they are
advanced enough to swim on their own.
Ian Gordon
, economic forecaster and chair of the
Longwave Group
:
The majority of gold investors are there because they can see the
impending collapse of paper money, but some investors, including
many hedge funds, are in the gold market simply because they are
trend-followers. In ugly markets, such as the one now unfolding,
these trend-followers sell their gold. During the stock bear
market, which commenced in October 2007, the price of gold
continued to rise into March 2008, even though the Dow had lost
about 17.5% from October 2007 to March 2008. But after March,
gold sold off into October 2008, losing about 35% of its value.
We feel that something similar could happen to gold, this time,
in the wake of falling stock prices. As for silver, prices fell
by 60% between March 2008 and October 2008. A 35% drop from
current prices would see the price of gold fall to something like
$1,200/oz. As for the stock market, we are extremely bearish and
believe that in the Elliott Wave market cycles, we are entering
the third downswing, which should take the Dow Jones Industrial
Average well below the March 2009 low of 6,470; perhaps 4,500
will be the target by September 2012.
Jason Hamlin
, president of
Gold Stock Bull
:
I am going to continue holding precious metals and buying the
dips.
The Gold Stock Bull
portfolio has been short general equities and long precious
metals for the past few months, which has paid off handsomely
from both angles. Having already hit my 2011 target of $1,800, I
now think gold could end the year above $2,000 rather easily. I
have not closed my short positions against emerging markets and
the Nasdaq, despite the current correction. I do not anticipate a
healthy rebound anytime soon, only dead cat bounces unless and
until a much larger QE3 program is announced. But even with the
massive liquidity injections, we are seeing the law of
diminishing return take hold. Eventually, the house of cards must
tumble. I have been allocating more towards physical metals and
towards funds that hold the physical metal such as Central Fund
of Canada (
CEF
). I have also increased my allocation of gold versus silver, as
I think gold will outperform under weak economic conditions.
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