These days, the news has been pretty negative, so we thought we would focus on an area of the markets where there have been positive developments; gold shares. Below is a chart of the AMEX Gold Index, which is quoted under the symbol HUI.
Those with an interest in technical analysis will notice that the shares have had a good rally, but remain well below their highs of March 2008. We believe that gold shares will rise much more than gold bullion in the next few years. Gold is close to its level on March 2009, while most gold shares are still more than 30% below the March 2008 levels.
We are not sure why, but so far President Barack Obama has been a compromiser, and has let Congress pretty much carry the ball with respect to TALF legislation. I am not sure why he has done that. It would seem with his popular mandate he has no need to compromise with anyone. Compromising with a group as un-statesmanlike and politically motivated as the U.S. Congress can damage his image, and we respectfully warn him against deferring too much to Congress.
Global economic data continues to be weak in many countries. Both Eastern Europe and South America are undergoing economic downturns much worse than in the more developed world. Among the developed countries, Japan has suffered greatly from its strong currency which has caused Japanese exports to decline markedly. Europe and North America are suffering, but less than the developing world. China’s economy is dimming, but still remains the lone global economic bright spot, but its positive growth will not be enough to have a major impact on the rest of the world’s economic growth.
In the U.S., we expect economic trends continue to slump until the effects of the U.S. stimulus hits the economic numbers in mid 2009. We expect modestly rising economic activity in the later part of 2009 as a result of the stimulus. The big question remains will growth continue in 2010 or will more stimuli be needed?
It is our considered opinion that more stimuli will be needed. This is the second stimulus package (the first was in 2008), and it will be followed by more packages. The effects will be limited, but the long term costs will be unreasonably and disturbingly damaging.
Worldwide fear is stimulating a rush into U.S. dollars and into gold. We understand the rush into gold, but do not understand why people have been rushing into the U.S. dollar when the U.S. economic condition is deteriorating daily and the U.S. financial situation is as bad as it has ever been. We are running up debt at an unsustainable rate. Sooner or later, all of the dollars’ new friends will leave the dollar in favor of some other currency where the debts are less and the politicians are more conservative in their spending.
For our clients, we are holding gold shares, U.S. Treasury Bills, and for those clients who sell short, some short sales in U.S. stocks. We caution investors that during bear markets, such as this one, the declines can give way to frequent and violent rallies. So, be careful with your short sales. We would not be surprised to see a big stock market rally occur within a few weeks or months as people start to realize that the stimulus will create at least a temporary economic lift.
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Thanks for listening.
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