Gold Rush Down

By Duru

December 5, 2004

I have been looking for another nice buying opportunity for gold for weeks, and on Thursday I finally got it. Gold had been dribbling away for two weeks or so ever since the introduction of the gold ETF - GLD - marked a short-term top in the yellow metal. A friend and I had been eagerly awaiting GLD ever since the markets first whispered about it last year. As the debutante's entry to the ball continued to experience delay after delay, we began to suspect that the coy GLD would finally come just as the party had hit its peak. Why did gold go down anyway? Well, the dollar has been on a one-way ticket to Downsville, and it has become what technicians call extremely oversold. The dollar has not been this low since 1995-96. A reaction rally in the dollar has been long overdue and when the dollar finally spiked on Thursday all sorts of speculators and the like all at once headed for the exits on their hedges against the weakening dollar - mainly certain gold stocks. It was the classic panic move, and one that was made without regard to the longer-term fundamentals of continued record-breaking budget deficits in the U.S. and a wobbly currency. Even more interesting is that gold stocks tended to react much more dramatically than the actual metal. This kind of divergence is one to keep an eye on as it could mean that certain gold stocks are actually moving from over-valued to under-valued territory.

To make the short-term picture even more manic, the jobs numbers came in anemic once again. For whatever reason, economists had largely agreed that the U.S. would create 200,000 more jobs. Instead, we got 112,000 and downward revisions to the happier numbers from the past two months. Even worse, the U.S. is supposedly allowing the dollar to drop to prop up its tepid manufacturing sector. Yet, this fading industry continues to bleed. The market reacted immediately on Friday by sending Treasury yields much lower (the 10-year yield dropped to 4.27% from 4.40%). Even with the Fed threatening to continue its campaign to march short-term interest rates back up, the long-term rates continue to swoon. In other words, a robust recovery we have not. But in an ironic twist, the sudden drop in rates sparked another quick rally in home-building stocks. So, despite the fact that job and wage growth continue to be poor, interest rates remain low enough to keep people comfortable with mounting levels of indebtedness. The chart below (from TC2000) shows that the housing index is, incredibly enough, on the verge of breaking out into a new bullish run. Even if the consolidation of the past two weeks fails to generate a new bull run, I would not call you crazy if you consider any subsequent dips a buying opportunity.

In the middle of all this drama, oil has been on a one-month retreat (apparently the Saudis got their instructions mixed up and sent oil spiraling downward after the U.S. presidential elections - sorry, some latent political humor). This past week featured the biggest two-day drop in oil since the early days of America's incursion of Iraq. Oil is now about 25% off its recent highs….again, when the speculators get wary of commodities, they all run for the exits all at once. And, yep, you guessed it, I consider this another excellent buying opportunity. Anyway, the drop in oil has allowed the markets to keep hope alive in the robustness of the retail spending that has been propping up the American economy. And this move has apparently been given much of the credit for the sharp one-month rally in equities. In fact, the retail index itself has not been this high since early in 2002! The 9-day chart from TC2000, shown below, shows the incredible run retailers have had as a group.

So where does all this leave us? At the beginning of November, I essentially taunted the bears and claimed that the market was kicking into a higher gear. Incredibly, I nailed that call and the bears have been grumbling ever since. As my faithful readers can imagine, it was a very uncomfortable call for me to make given my persistent angst over the mounting debt that is helping the economy to limp along. But I am also not one to argue with the market or to try to talk it down. Overall, the market continues to look good to me in the short-term. I suspect that any correction worth talking about is at least another earnings season away. Bushie will get inaugurated right in the middle of earnings season, and we know how the market likes to mark big dates with substantial moves before or after these things. Keep an eye out and as always, be careful out there!

© DrDuru, 2004