Stocks, Gold, and the U.S. Dollar

In a July 24, 2008 article, Commodity Breakdowns Warrant Defensive Action, I wrote the following based on the ugly look of the chart of financial stocks (XLF):

"While financial stocks have hit a violent intermediate bottom and could rally for a while longer the odds favor lower lows in the months ahead as housing prices continue to decline. The chart below illustrates the structural nature of the problems facing the housing and financial industry. There are fundamental reasons financial stocks have been hit so hard, reasons which go way beyond short selling. Additional bank failures in the coming months would not come as a surprise, which is supported by the rapid deterioration of the sector. Since our economy has become so dependent on the availability and use of credit, these problems will continue to impact U.S. and global growth."

Chart from July 24, 2008 CCM Commentary

I bring it up because the two charts below look so bad you have to conclude we still face serious fundamental problems in the months ahead. The chart below paints a disturbing picture for U.S. stocks (S&P 500 (SPY) and the Dow (DIA)).

Similarly, the chart of NYSE new highs minus new lows is very disconcerting. It illustrates we are way, way overdue for a bounce or rally in stocks. The chart shows a very extreme oversold condition. My concern is the fundamentals behind the chart below - the chart is no accident. We have fear based on fundamentals. Yesterday, the Dow was down 189 points. It would be nice to see these losses overcome with at least a 189 point rally.

We should all keep our eye on the U.S. dollar and future inflation. The inflationary pressures will be very strong on the other side of this credit crisis. For now, there is no need for immediate action.

Gold (GLD) and miners (GDX) offers a way to protect yourself from money creation and currency debasement. The fundamentals support gold. However, the technicals are not yet all that impressive.

Disclosure: none

Comments

[Hal.P.:]

Your statement, "The inflationary pressures will be very strong on the other side of this credit crisis." is the one that really sticks in my mind and is what I've been expecting.

2008 Oct 10 11:36 AM

[bowman711:]

It looks to me like 'the bullion bank boyz' are really at it again; gold, after drifting down in London subsequent to reaching a Hong Kong high of $933.60, then gold started dropping like a rock as soon as NYMEX opened. It doesn't make human nature or economic sense that investors are fleeing into dollars that are being inflated into oblivion. With gold going virtually nowhere during a 22% crash of the DOW this week, the only thing I can think of is that 'the Select,' those behind 'the boyz' at the bullion banks, are planning to default on U. S. dollar debts (or something of similar magnitude) which would result in a complete breakdown of the monetary system, leaving those holding dollars with virtually nothing. I would not be surprised to see that sometime between the election and the inauguration in January.

I learned today that the major countries are talking about suspending all equity trading for however long it takes for them to develop new 'trading rules.' It would take just such an international meeting for the current monetary system to be replaced with something else. Something absolutely stunning will cause people to try to get out of their dollars, euros, pounds, yens, etc., leaving them worthless.

It looks like 'the Select' are driving as many people out of gold (and silver) as possible, which they are buying at fire sale prices. No matter what form the new currencies take, they will sooner or later have a price in gold. Then, they can convert to the new money and buy up the stock market at salvage, fire sale prices.

Right now, I'd say that it is absolutely essential for one to have their house (& cottage) completely paid off so they own it outright. In fact, later today, I am going to call my county to see if I can even pre-pay my property taxes for the next couple of years. [During the Great Depression, most people lost their homes to tax delinquencies.] Then, I'd get everything else you can into gold or silver. Best would be the actual gold coins or bullion, but that is virtually impossible to find now, so the next best is to get the gold and silver ETF.

Any group evil enough to crash the monetary system, and steal the wealth of virtually everyone in society, is evil enough to outlaw gold for anyone except 'the Select,' but I can see no other option but to try to survive with the only store of monetary value that could be counted on for the last six thousand years.

I see a situation that is unprecedented in its seriousness - and in its evil. I can't think of any other scenario to explain why gold would go down during a financial panic, can you?

2008 Oct 10 01:18 PM

[CLH:]

Gold always goes up during a panic but its a quick trade and then its all over. When the dollar is going up gold must go down and it will. Im shorting gold.

2008 Oct 10 11:03 PM

[mrflick:]

On July 31, Rep. Ted Poe introduced H.R. 6690, the "Sound Dollar and Economic Stimulus Act of 2008". It is vital that this bill become law.

No, not the "Amero" which is a smoke-screen rumour, but rather something far more straight to the point: a "New Dollar" which, contrary to the present devalued dollar, would be Gold-backed, however not by just any gold: it will be 9999 proof gold bullion, with some sort of 100% fool-proof security factor - e.g., either an embedded chip or hologram that will transform it into "Global Reserve Gold", or financially "sacred" gold - that will have a value maybe ten times higher than normal "profane" Gold. At the same time, an extended banking holiday will be declared in order to implement the change of currency (just as happened in Argentina several times in recent history, notably when former president Alfonsín introduced the "Austral" to replace the highly devalued peso).

Transition to the new currency will be at terms highly beneficial for those banks, companies, citizens, allies and other "preferred allies and friends" of the US who will get One New Dollar for each "old" dollar. Then, certain powerful holders of dollar-denominated instruments - cash, US Treasury Bills and Bonds, and the like - will be given some preferential treatment based on specific US geopolitical and geoeconomic interests such as, for example, the governments and interests of the European Union, Japan, maybe China, and specific institutions and global corporations who will be able to change their old dollars for New Dollars at acceptable rates of exchange, say 2, 3 or 4 old dollars for every New Dollar.

For the rest of dollar-holders - i.e., vast numbers of private investors in all parts of the world in countries in Latin America, Central Europe, the Muslim World, Africa, etc. - the US Government will simply say that their respective local markets will need to determine how many old dollars will buy a New Dollar, and that this will be governed by the market forces of supply and demand. We will then see currency traders of all shapes and sizes offering One New Dollar for every 8, 10, or 20 old dollars in the hands of desperate masses of people trying to get rid of those creased green-backed bits of paper of falling value.

The immediate effect of this would be to further spread the socializing of US banking losses into emerging markets and weaker economies outside of the United States (i.e., New Dollar would allow the bankers to selectively export the US currency's inflationary erosion towards specific regions and segments of the world).

2008 Oct 22 05:22 AM