Falling Dollars Friendly to Gold & Silver
By Michael Hartman, May 2, 2003
The U.S. Dollar is still the big story for the week as it has lost another 1.4% since last Friday to close at 96.94 on the U.S. Dollar Index. As the dollar loses purchasing power, things become more expensive. It will take a much lower dollar to reign in the red ink from the U.S. Current Account Deficit. Between our trade deficits and Federal Budget deficit we are running in the negative to the tune of 5% of total GDP. That's where all the red flags go up in the context of global fiat currencies. The levels of deficit spending are now putting big pressure on the dollar, which is headed for further declines. This trend should remain in place for the foreseeable future. Currency trends usually last about six to eight years, and we are only a year and a half into the current dollar decline.
The
dollar decline has been a very happy occasion for precious metals
investors this week as gold added another $7.70 to close at $340.70,
after bouncing its head off the $343 resistance level yesterday and
today. Once we clear $343 there will be some resistance in the $350
area, then we should be clear for another run to test $400. As the
dollar declines, the price of gold goes down in other currencies,
which puts strength in the physical market since foreign investors can
buy at bargain basement prices. Silver also put in a nice performance
this week to close $0.15 higher at $4.77 per ounce. Notice the dollar
was down 1.4%, but silver added 3.2% to its price. Moving forward
silver will have more catching-up to do, so I expect it to outperform
within the commodities sector, and especially outperform versus paper
assets. Silver is undervalued based on its own fundamentals of supply
and demand, but the declining dollar will work to multiply the coming
gains for silver investors.
But Will it Stick?
Stocks are breaking-out to the upside. The Dow Industrials added 277 points or 3.3% this week to close at 8583, the S&P 500 added 3.4% to close at 930 and the NASDAQ was the best performer of them all by adding 68 points, or a very nice (if you're long) 4.7% to close at 1503. The rally from the October lows last year was actually a much bigger rally than we have been in for the last month and a half. On October 9th the NASDAQ closed at 1114, then ran to 1485 on December 2nd for an overall gain of 33.3%. The current rally began on March 11th at 1271 and today's close at 1503 puts the current rally at 18.2%. Additionally, the rally that began in October had advancing issues ahead of declining issues by a ratio of 3.6 to 1, versus the current rally with advancers ahead of decliners by a thinner margin of 2.8 to 1. Also note the top in early December at 1500 and today at 1500 could be a BIG double-top formation.
Let's take a look at the three indexes in a shorter time frame. The charts
are showing a forty-day window on one-hour intervals. By drawing in
the trendlines of the recent market advance, we can see that they have
taken the shape of two identifiable formations. The Dow Industrials
with the "flat-top" triangle is considered an ascending or rising
triangle, which is a bullish formation. According to the
"Encyclopedia of Chart Patterns" by Thomas Bulkowski, an ascending
triangle has the statistical probability of breaking out to the upside
68% of the time, which means the Dow should go higher next week. At
the same time, we see the S&P 500 and the NASDAQ in a formation
called an ascending wedge, which is considered a bearish formation. An
ascending wedge resolves itself to the downside in 76% of its
occurrences. So we have two of the three indexes in bearish formations
that have a higher probability of happening. What all of this tells me
is that we will probably have one final shot to the upside of 2% to
5%, then we go back to the basics of the primary bear market. Somebody
will need to wake me up out of my coma if the S&P 500 can break
through its neckline at 965.
The spin can only last for so long. Economic reality might even return to the markets next week when the Treasury Department goes out to sell a whopping $58 billion in new debt. Treasury bonds, notes and bills changed very little this week, with the ten-year note yielding 3.92% and the thirty-year bond yielding 4.83%. According to Bankrate.com, the thirty-year mortgage rate stands at 5.36% versus 6.35% a year ago. I firmly believe we will continue to see low interest rates as the Feds work overtime to devalue the dollar! Normally when a currency is falling, the policy makers will raise interest rates to strengthen their currency, but they can’tdo it today with the incredible amount of debts in government, business and households. I shudder to think what will happen to the real estate market, especially the high-end houses, when rates begin to climb. It won't be pretty.
Spin of the Week
Without
a doubt, the best spin of the week goes to today's report on
unemployment. Today the stock market went up "supposedly" from the
fact that the U.S. economy lost fewer jobs than expected. This is
starting to sound like the earnings reports for the quarter. All they
have to do for earnings is lower the forecasts enough to say that
earnings came in "better than expected." In the case of
unemployment, economists were anticipating a loss of 60,000 jobs and
the Labor Department reported today that the economy only lost 48,000
more jobs. In the last three months 525,000 jobs have evaporated in
the USA. Could an estimate that was off by 12,000 jobs really be
enough to propel stocks to new heights?
Here's another kicker: The prior two months were adjusted down to show additional losses of 12,000 jobs. Could this be some tricky accounting by the Labor Department? The fact remains that the employment numbers are considered a LEADING indicator. With the consumer standing as the backbone of our economy, we will need to get Herbie Homeowner back on the job, or he will soon be Herbie in Foreclosure, using unemployment benefits to buy groceries.
He's at it Again
Did you see what Warren Buffett bought today? The man is brilliant! He just made arrangements with Wal-Mart Stores to purchase the McLane Company, a $15 billion food distributor. McLane is the only food distribution company in the U.S. that can deliver to Anywhere, USA. At last count, they had thirteen distribution centers nationally that cover literally every grocery, drug and convenience store in the country. There are some groups of regional distributors that work cooperatively to try and compete with McLane, but using multiple distributors for big food chains is cumbersome and inefficient. McLane was losing money, but it should not take a whole lot of "Berkshire" discipline to crack them into shape! They just need to improve in their operational efficiencies. With all of the mergers and acquisitions in the grocery industry over the last few years, McLane is well positioned for big growth.
So now we can recap some of Mr. Buffett's recent purchases. In 1997 he bought roughly 130,000,000 ounces of silver and had it shipped offshore for storage, a year or two ago he bought gas pipelines for the distribution of natural gas, which should have big growth for "clean" energy in the future, and now he's buying into the food business. Smart man! Most investors can only dream of having his capital, and even more than that, his foresight and patience. I guess I'll need to keep workin' at it for a while! For now, have a great weekend and best of luck to you in your investment decisions!
Michael Hartman
© 2003 Michael Hartman
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