Gold: Only Physical Asset That Isn't Deflating

By Eric Roseman

October 6 probably came close to marking a short-term bottom for equities. Only 13 stocks hit new highs (almost all of which were short-dedicated ETFs) and a mind-blowing 1,973 stocks posted new lows.

Advancing volume was just 119,572,320 compared to declining volume of 1,753,362,656. This data clearly tells you that we're heavily oversold and stocks are going to post at least a big bear market bounce at any time.

I'm certainly not predicting a new bull market any time soon. The United States and the majority of foreign economies will continue to come to grips with a protracted slowdown that will curtail consumption, inhibit expansion and result in a long economic recession. But stocks and weaker credits are going to muster a spectacular short-term rally - and soon.

The fear gauges I track are completely off the charts heading into Tuesday's trading. The most telling of these indicators is the VIX, the Chicago Board Options Exchange Volatility Index. The VIX was down more than 8% yesterday and that's a good sign because it's been on a ceaseless upward march since late August.

Fear Bubble About to Burst

The VIX hit the record books on Monday as global markets reeled from international news. At 52.05 before the start of yesterday's trade, the VIX is trading at maximum pessimism as investors scramble to survive the worst global panic since the 1973-1974 crash.

History suggests that a significant turning point lies ahead for stocks, which are tremendously oversold. A rally will ensue and it's likely to be quite powerful.

The smart investors are selling into strength or on days when stocks advance. Other smart investors are even buying their favorite stocks at big discounts compared to just a few weeks ago. Warren Buffett is one of these investors. You can cherry-pick or average-down some great companies right now but you must have at least a five-year investment horizon.

Also, gold should be at least 10% of your personal net worth at this point - if you can get it. There's a major shortage of physical gold right now in the United States and Europe. I'm disappointed gold isn't trading north of US$1,500 right now amid the panic.

With supply shortages now becoming acute and production growth almost non-existent this year, I'm still forecasting at least US$2,500 gold before this bull market is over.

Gold is the only physical asset out there right now that isn't deflating. And I have a feeling that gold prices can rise in a deflationary economy. This might yet be its finest moment.

Disclosure: none

Comments

[sorgmot:]

Look for long term investmet binges and the sober up periods that followesto see where we are.

The railroad binge from 1840 to 1870 was followed by a major international financial collapse in asset prices lasting to 1900.

The auto and highway binge from 1905 to 1930 died in the financial collapse ot the 1930's.

The house building binge from 1950 to 2005 is now in its death throws which should last until 2020 at leasts.

Each binge explodes the use of borrowed money during the expansion phase and an inplosion of the money supply in the contraction that follows.

2008 is the first year of current binge cycle's money implosion. The money implosion under way is international and global and in many currencies.

As of October 2008, many countries and currencies are suffering a cedit crisis (you can't get your hands on enough to pay money withdrawals if you are a bank or your bills if you are a citizen). Bank withdrawals are exploding as deposiitors pay bills in excess of their earning or simply withdraw money to put it in a safer use for fear that the bank will fail.

As of October 2008, citizens and banks face a liquidity crisis that is forcing asset prices down in currency terms. The US $ is appreaciation against all other assets like cars, houses, stocks, since they must be sold to get enough money for the mortgage or clothes or food.

Citizens are retrenching as fast as they can and more and more are throwing houses and other assets like stocks and pension funds onto the market to raise money to buy food.

Stock markets are collapsing as are retail sales as are used car prices as are the number of jobs.

Loan defaults increase so that banks keep on loosing the ability to loan becouse cash infowes decline.

The vishouse cycle accelerates.

Elected officials respond to their patron in the cartels and monopolies and not the citizens. They could send money to the public and reduce taxes to help citizens. They do not. Tax proceedes are already falling and the pols want more perks for themselves from the cartels and monopolies they maintain..

What next?

Banks closee branches and lay off employees by the hundreds of thousands. Lack of sales forces non-bank businesses to shut down and lay of more hundreds of thousands. By the time all the defaults are in there is mass economic weckage and complete collapse in living standards.

Good luck

2008 Oct 10 11:19 AM

[Smarty_Pants:]

Aside from sorgmot's rosy summary of the near term, trying to predict the bottom of the current downdraft will most likely cost money.

Until it reaches zero the market can always keep going down. Just because VIX has never been as high as 70 before doesn't mean it can't go to 100, or 200, now.

2008 Oct 10 11:53 AM

[traderstraffic:]

Gold at 2500 not while the manipulaters are at work. Get ready for the really big short next week. You have not seen anything stink so bad as what they are going to do next week.

2008 Oct 10 03:50 PM