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XMFSinchiruna (26.56)

Final Dip of the Precious Metals Correction - all aboard for $1,200 gold



April 18, 2008 – Comments (4)

Whether by means of Elliott Wave Analysis or through careful scrutiny of relevant news and market action, today's dip in gold and silver was foreseen by many.  While I never attempt to predict or play upon short-term movement in markets as volatile as gold and silver, I nonetheless had a feeling yesterday that we would have a big dip today.  In fact, I would prefer a continuation down to the $870-$880 range for gold, as this would build a stronger spring-board for gold's ascent to $1,200.

Short-term movements like these don't phase me one bit anymore.  Back in May/June of 2006, during the previous big correction, I was certainly phased.  I thought for a moment that the rug had been pulled out from under the commodities super cycle.  :)  Of course, the lesson I learned in time was that I was standing too close... one has to step back and consider the wider context, viewing daily movements as pure noise.

The underlying fundamentals for gold and silver remain fully intact. 

Corrections of this depth, both in the 1979-1980 spike and the current cycle, have historically lasted about 4 weeks, with only a couple of exceptions (one being the 2006 correction mentioned above which actually dragged on for 15 months while interest rates remained stable).  After watching a decline in the number of short positions on gold futures contracts in the latest Commitment of Traders report, I propose that wherever bottom is reached in this dip... that is, wherever it next reverses direction convincingly, will mark the end of this correction.

Also, consider the real story regarding what is happening with the US Dollar today.  The USDX stands at 72.28 at the time of this writing, up .96 on the day.  But is it inherent strength in the USD that's behind the move?  No, it's the beginning of weakness in the Euro.  Recall that 57.6% of the USDX value is determined by the USD's ratio to the Euro.  If investors, sovereign funds, etc. that have already shifted assets into the Euro from the USD begin to sense future weakness in the Euro (which shares many fundamental weaknesses with the dollar, though not yet on the same scale by any means), they may yet again shift their assets... out of the Euro... into some other currency.  This may cause a momentary bump in the USDX as Euro weakness makes the USD appear to reverse... but it's totally relative, and indicates nothing in the way of a fundamental reversal, unfortunately.  What will investors fleeing the Euro move to?  Hmmm... burned by two successive fiat currencies.... where to go..... Gold?  Definitely... and this is why the next move in gold, in my opninion, will be a powerful surge indeed.  Still, the when and the how don't matter to me.  I know gold is going to $1,650 at the very least, silver to $50, so I'm just watching it all unfold with infinite fascination.



4 Comments – Post Your Own

#1) On April 19, 2008 at 10:02 AM, XMFSinchiruna (26.56) wrote:

I just saw this article today, and it is relevant to paragraph 3 above. 

Soros says Euro Can't Replace Dollar

April 17, 12:28 pm ET

By Aoife White, AP Business Writer

BRUSSELS, Belgium (AP) -- The euro cannot replace the U.S. dollar as the world's anchor currency, billionaire financier George Soros said Thursday, warning that investors are instead fleeing currencies to put their money into real assets. "I don't think that the euro can replace the dollar and a system with two major reserve currencies? Not a stable system," he told a Brussels event organized by the Centre for European Policy Studies think tank.

The U.S. dollar's reign as the "unquestionable reserve currency of globalization" allowed the nation to run up a "chronic" current account deficit that could have continued indefinitely if rising household debt and a slipping housing market had not triggered the current financial crisis, he said.

"What we have now is a period of instability and heightened uncertainty," he said, refusing to "predict the unpredictable" and say when the economy might hit calmer waters again.

"I think that eventually the dollar will re-emerge as the reserve currency, but then the U.S. will have to abide by certain rules that the Washington consensus has been imposing on others but not on the United States," he said.

The U.S. Federal Reserve's efforts to encourage bank lending by cutting interest rates has been "impaired by the unwillingness of the rest of the world to accept dollars," Soros said.

"The euro, while it is obviously an alternative, is not a truly attractive alternative, and therefore there's a general flight from currencies," he said.

"That's how you have the creation of sovereign wealth funds which are basically seeking to diversify from monetary assets to real assets," he said.

These state-owned investment funds can help the financial system by recycling trade surpluses that Asian and oil-producing nations are making out of surging trade with Europe and the U.S.

Soros may be one of the few winners of the subprime housing crisis that brought investment bank Bear Stearns Cos. to its knees and forced many major banks to report billions of dollars in losses on complex investments based on the housing market.

According to Institutional Investor's Alpha Magazine, Soros' Quantum Endowment Fund -- which he no longer manages -- made $2.9 billion last year with returns of over 30 percent.

Soros said he believed that current financial market turmoil was destroying capital and if investors managed to hang on to capital they would be "doing pretty well."

"Either you have to be very very cautious or you have to be very nimble. One or the other," he said.

The Hungarian-born financier is promoting a new book, "The New Paradigm for Financial Markets: The Credit Crisis and What It Means," where he describes the recent financial "superbubble" as the end of an era of cheap finance and loose regulation.

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#2) On April 19, 2008 at 12:17 PM, UncommonSense (< 20) wrote:

The only reason your ranking is 99 is because you have made a lucky one-dimentional bet on commodities.  You lack diversification and honestly when the cycle busts, you are going to get slammed.  You say you "know" gold is going to the $1650 mark... why that price?  Do you have some kind of crystal ball?  You just sound stupid when you say that kind of stuff. 

I can't wait to check your ranking in a year from now.  Your strategy is simply to chase what has been working... even to ridiculously high and unsustainable levels (i.e. yamana gold at $19 a share).  Think for yourself for once and try to grasp the big picture.  The dollar is going to remain the world's reserve currency and economic growth will continue.  When it does, investors who have been parking their money in commodities will seak higher and less risky returns (in stocks, bonds, etc).  The boom we have seen in the last 6 months was driven by panic.  Mortgage backed securities markets are essentially at a standstill thus the capital that used to flow within them is now flowing in the commodities markets.  

Just wait another year and we'll see what happens - but my bet is that everything is going to be jolly good.  That's why I'm not only placing bets that commodities will decline, but also that financial companies and REITs will surge.  That strategy is beginnig to work.


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#3) On April 19, 2008 at 7:15 PM, XMFSinchiruna (26.56) wrote:

Uncommon Sense.  Disagree with me if you wish, but please refrain from resorting to insults, especially on my own blog.  To do so is not in keeping with the spirit of CAPS, which is well loved by members as a place for cordial discussion.

I am chasing nothing.  I have been heavily invested in commodities since the very early days of this commodities super cycle, and my target prices for when to consider starting my exit from said instruments are based upon a carefully reasoned and well-researched process, so I take offense with your characterization.  I anticipated the housing slowdown, the precipetous decline of the USD, and the systemic de-leveraging of the financial system years before these were the hot topics for discussion.

The most ironic statement in your comment was the one about thinking for myself 'for once' and grasping the big picture.  :)  That did make me chuckle, since it was my unwillingness to think like everyone else that led me to gold and silver in the first place, and grasping the big picture is precisely what keeps me invested this way. 

By all means please do check back in a year's time.  I hope we're both doing well because, again, the point of CAPS is to help each other.  I wish only the greatest success for my fellow CAPS members, and I care not about my score, but about the ideas and information we exchange here.

I will say, though, that I hope you're not shorting gold or gold equities in real life.  An experiment in your CAPS profile is one thing, but to bet against gold at this stage could have brutal consequences, IMO.

Fool on, and good luck to us all!

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#4) On May 18, 2008 at 2:49 AM, jester112358 (28.08) wrote:

Uncommon sense: 

You should learn the most important economic lesson of all:  Supply and Demand.  There are too many $ and people chasing too few, undercapitilzed commodity producers.  Well now massive capital will flow into those sectors, oil, Ag, metals so hope along for the ride.  The supply of real assets is finite.  Thus, the commodities supercycle suggested by one the greatest traders of all time, Jim Rodger's will continue.  Pity the fool who isn't is real assets in the future.  Financials and credit markets and the companies who manage them are all smoke and mirrors as Soros pointed out in his great book " crisis of global capitalism."

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