Its been 6 months since I wrote the lag between cause and effect and
thought it was a good idea to repost the article as the fundamentals and
technicals are still the same and my "best case" scenario is playing out.
Nothing has changed from this view.
The Lag Between Cause and Effect:
What to Expect in 2009 and Beyond
By James M. Carrillo
January 12, 2009
Many people are wondering why gold isn’t exploding upwards while others
believe gold has topped out and is set to decline. The truth is most likely
someplace in between the two as the battle between bulls and bears rages
on.
My views will always be based on both technical and fundamental analysis. I
use both to make my decisions not only on where I work but where I store my
money. Last year I was a firm believer that the stock market was grossly
over valued, profits vs. earnings were skewed and that at some point the
technical aspects would reflect the fundamentals. In January of 2008 many
of you know how adamant I became about an imminent decline in the stock
market. Why? I used both technical and fundamental analysis.
In 2007 the fundamentals were saying that PE ratios were out of whack and
that the housing boom was bust, everything said sell yet the market
continued to climb. Why? Technically stocks were still in a bull market.
Traders and money managers will stay long despite fundamentals until they
get a technical sell signal. When you get both technical and fundamental
signals money will be made. You have most likely heard “buy the dips”
or “sell the rallies” many times.
As can be seen by the chart below the market I use to monitor the health of
the S&P 500. It was in an upward march from the technical break out in the
2nd quarter of 2003 until the technical breakout to the downside in
December of 2007. This is why I became a huge stock bear. BOTH Technical
and fundamental factors screamed SELL. But it wasn't until May 2008 that
the effect began to be felt.
S&P 500 Stocks
Why did gold go down? The enormity of the losses in stocks completely
destroyed brokerage company profits and balance sheets, leading to the
meltdown of the financial institutions and companies were awash in debt.
Hedge companies went bust, banks went bust and you know the rest. The only
asset class that had made money was commodities, which were later destroyed
by the weak fundamentals of the economy. They then declined rapidly once
the technical aspects confirmed the fact in September of 2008. Once again
notice the lag between cause and effect.
Commodity Index Chart 2000-2009
Money poured out of all paper assets and flooded into the liquidity of
dollars. As I have told many of you I think this will go down as the worst
move ever made. Kind of like jumping out of a hot frying pan directly into
the fire itself. Why did the dollar rise? When you sell assets like stocks
and commodities those funds are initially converted into dollars. In
essence you and everyone else was buying dollars which reversed its course
rapidly. This led to a decline in Gold prices even though the fundamentals
said buy , buy, buy gold. The technical side became short term weak and the
dollar,despite its horrid fundamentals technically, became a buy! This
signal in my opinion was to be avoided because it is NOT confirmed
fundamentally. As explained later in this article on money supply
growth.
U.S. Dollar
The dollar now is still on the buy side however the fundamentals say stay
the heck OUT. A monthly close below the .79 cent level triggers another
massive sell signal confirmed by gold's break which did not happen in 2005
which is why it is an unconfirmed buy and also based on extremely poor
fundamentals.
Why are the U. S. Dollars fundamentals so bad? Mass creation! If you take
the time to look at the Federal Reserve site and look up the money supply
growth you will note that we have created/printed more dollars in the past
3 months than in almost the entire history of the federal reserve! They are
not done yet. This new money is backed by ONLY the full faith and credit of
the United States which has lost faith Internationally, and within our own
borders, and has its credit being downgraded worldwide. If it were you and
me they would be repossessing the house.
GOLD Analysis
One thing that should be apparent by now is the lag between cause and
effect. In 2007 there was no fundamental reason for stocks to be rising
except the technical aspects of the market were still in place. There was
no reason for commodity prices to continue their upward spiral until July
of 2008 with world economies melting down. There was no reason for the
dollar to explode upward with such dismal fundamentals.
Go back and note the S&P 500 graph. See after the break below the moving
averages how the market then snapped back to the break point before the
huge downward plunge. If we are at all lucky this pattern will occur in
gold in order to give us all a chance to accumulate.
Note on the chart below we know the fundamentals are with gold to rise, but
as of the close of January 31, 2008 we have the confirmed a major break
technically! The last piece of the puzzle will be the double confirmation
with the dollar breaking below .79 cents. If you aren't in gold by then you
may find yourself chasing a move that could be one of the most explosive in
history. If there is any supply.
GOLD
Gold actually posted a 5.5% gain in 2008 despite the financial ruins of
most markets and a rising dollar. Gold is the anti-dollar and it mirrors
its value. Based on my research on both the fundamental supply shortages
and huge worldwide demand of gold coupled with the unprecedented mass
creation of paper dollars, terribly weak stock technical and fundamental
appeal, it appears Gold will be the best play of the next few years. If we
are lucky we will get a choppy sideways pattern until August with a moon
shot move up into 2010. However my stance is better a year too early than 5
minutes too late. Accumulate gold now before the dollar falls into the
abyss.
Predictions
Yes predictions, they are based on over 30 years of experience. No feather
in my cap but my overall track record speaks for itself. In 1978 I began
buying gold as a college student studying economics and gained a position
with one of the premier precious metals dealers in the country. I noted
that markets were going to turn when interest rates hit 20% and they did.
In 1982 I became a stock and commodity broker. In 1986 I also joined a firm
to deal with what I saw as a coming boom," information technology". That
worked out very well. In 1999 I saw the rapid money supply growth prior to
Y2K and started watching gold again very closely. After 9/11 I saw more
money creation. Then gold finally gave me the technical buy signal.To
couple with its fundamentals, I began buying. In 2004 due to unrealistic
low interest rates due to 9/11. I told my wife we just won the lottery in
real estate and convinced her (that was not easy) that we should sell all
of our real estate and go to gold rather than cash and relocate the family
to Arizona, pay cash for a modest home and let the economy go through what
I felt would be a major adjustment. Family and friends thought I had lost
my mind. In 2004 I decided to come to Swiss America rather than just sit
around watching my investments. There are those who make things happen;
those who watch things happen; and those who don't know what the heck
happened.
2009-2010
STOCKS - Will chop in a wide range as base building begins. I see a new low
in the second through fourth quarter of 2009. The Dow will base build after
this new low possibly in the 6,000-5,000 area for about 5 years. However,
it could get worse. Personal Credit will doom many more banks, unemployment
will surge, many businesses will go bankrupt or close their doors in the
1st half of '09. A record number of Municipalities will fail. States will
be needing bailout money. Don't be tempted this year. Stay away.
REAL ESTATE - A bottom will hit after 2009 but the doom and gloom will
spread to the Commercial sector. I see massive problems in commercial real
estate in '09. Their will be bargains if you go to the banks themselves but
use the site www.zillow.com and try not to pay MUCH more than the 1999
price. Yes 1999.
U.S. DOLLAR - Will sink by 10% - 20% or more by 2010.
GOLD - Could go to $2,000.00 very rapidly by the end of 2010. This is
highly unpredictable but should be amazingly profitable.
BONDS/Bills/CD's- If you like negative yields for safety go for it. I
prefer to wait for the double digit rates coming in a few years when the
economy is deemed stable. At that point the Fed will be jacking up interest
rates to slow down the inflation that they caused by the mass printing of
dollars.
Remember there is always a lag between cause and effect. Buy Gold and wait,
don't wait to buy gold!
DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of GoldIRAS.com. Past performance of any investment is no guarantee of future performance. All investments have risk.
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