Agora Financial’s Rude Awakening

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• The Dow ends the day back where it began the millennium,
• Where to from here for the great commodity super-cycle,
• A year in the life of the gold market and plenty more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

If the stock market were our horse, we’d have an empty stable and a big vat of glue by now. Not only has the old mare brought investors right back to where they started almost a decade ago, but she’s bucked and kicked like a mule for most of the journey too!

On the eve of the new millennium, the Dow Jones Industrial Average clocked a then record of 11,497.12 points. A couple of weeks into the new era and investors saw their beloved index reach 11,722, or about where it was a week ago…before it sold off 300 points.

The sad thing is, we’re not just back to where we started. As we look around, we notice that the fields here are in worse shape than when we left them, back at the end of the 90’s. For one thing, it takes about $135 in today’s money to buy what a crisp $100 note would buy us back in ‘99. And that’s
according to the official CPI figures. We notice that most things one might desire – say, some rice in their belly or a little gold under the mattress – has gone up far quicker than that.

In the much shorter term, we see that the things we want have become a little cheaper. Gold sold off in recent weeks and trades, as we write, back under $790 per ounce. Oil too, despite the voracious demand from emerging markets and ever-tightening supply chains, has dipped from its $147 high to around $113 a barrel. Our dollars, meanwhile, have enjoyed a bit of a bounce of late. The dollar index has jumped from under 71 back in March to around 77 today.

Such trends have prompted those with their noses too close to history’s great book to ask whether the commodity bull has run out of gas.

“Here’s the current popular sentiment,” explained our resident short seller, Dan Amoss, in yesterday’s 5-Minute Forecast. “Now that the ‘euro bull’ case is unraveling, traders are dumping commodities. Since commodities are falling, many are starting to believe the Federal Reserve won’t have to tighten monetary policy to ‘fight’ inflation. Therefore, you should buy financials and short energy, gold and commodity stocks.

“This is nonsense,” Dan continued. “The commodities down/financials up trade is not likely to go much further in terms of price. So let’s stick with lasting trends - the trends that are supported by sound fundamental research, rather than hope.” 

[As a quick aside, our publishers have actually discounted Dan's Strategic Short Report, the very same publication that gave readers the chance to more than triple their money on Lehman Brother's the last time this kind of "financials up/commodities down" mentality was en vogue. If you want to take a look at the offer, available for two more days only, click here] 

Inclined to agree with Mr. Amoss, we thought we’d dedicate today’s edition of your Rude Awakening to the question on everyone’s lips. Below you will find some expert commentary on gold from Adrian Ash, research director at BullionVault, and a few thoughts on the recent trends from your fellow readers. Enjoy…

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Cheap as Chips
By Adrian Ash

The sharp drop in world gold prices starting in late July knocked the cost of physical metal more than 20% off its record top of mid-March at last week’s low point.

That level – just above $750 per ounce – also happens to sit right where the uptrend starting in Sept. 2005 now lies. That means, for technical analysts at least, either a test (and perhaps collapse) of the bull market…or a screaming opportunity to buy gold on the cheap.

Whichever way prices now move from here, however, it’s worth considering the typical shape of a year in the life of the gold market.

As this chart shows – swapping the dollar for British Pounds Sterling, to remove the impact of the dollar’s 30% drop on the foreign exchanges – the past 10 years have seen the gold price follow a clear and regular pattern.

There have been exceptions, of course – most notably 2003 and 2006 – when the “summer lull” that followed a sharp rise failed to match those high prices again by late-autumn.

But in the main, and with a near-tedious rhythm, the price of gold has risen in spring, slipped back or steadied in summer, and then enjoyed very much sharper gains once more, before the next year really gets started.

There are no guarantees this shape could be repeated this year, of course. With the gold price falling so far, so fast, from its recent all-time record highs, sentiment amongst professional and institutional traders has clearly turned against the metal.

Gold buying by the world’s No.1 buyers, meantime, has indeed collapsed, with imports to India dropping by 47% in the first half of 2008 from the same period last year. Indian gold buyers tend to account for the surge in physical buying seen during the autumn, as their festival season culminates in Diwali, the “festival of lights”.

Diwali falls at the end of October this year. Reports out of India say the recent sharp falls in gold prices has already led to strong investment and jewelry demand. And here in the West, the economic background remains very bullish for Gold – at least according to history.

US interest rates now lag inflation in the cost of living by more than 3%. A mountain of leveraged debt still teeters above Manhattan and the City of London. Government debt is rising worldwide, with a true “monetization” of bad loans at Freddie Mac and Fannie Mae now only a few weeks or months away.

If you thought about buying gold but were deterred by this spring’s sudden high prices, it may be worth noting that the case for gold remains as it was. Too much debt, plus too much inflation, threatens to destroy the value of savings and wealth held in paper (whether in bonds, cash or equities). Physical gold, in sharp contrast, cannot be created at will. Owned outright – in your name alone – it’s also no one else’s liability or promise to pay.

Professional gold bars, stored securely and at very low cost in – say – Zurich, Switzerland, also represent one of the world’s deepest and most liquid capital markets. That’s simply not true of gold coins.

And it’s worth noting, perhaps, that if the coin and small bar market can hit sudden supply problems like the Current Squeeze even as prices are falling, just what might become of liquidity – the ability to sell quickly for full value – when private investors come to sell en masse…?

[Joel's Note: If you’re interested in grabbing some gold of your own, Adrian Ash is the man to talk to. He’s the editor of Gold News and head of research at BullionVault – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees. To learn more, click here.

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And now, some mail. We asked readers recently for their take on the current commodity selloff. Is this the beginning of the end for natural resources…or just the end of the beginning for a much larger super-cycle? Here’s what you had to say on the matter…

Rude Reader Susan Bachelor reckons…

My opinion is that commodities will continue to be in high demand but I don’t think the stock market will be a good place to be invested in over the next few years.

If there is a stock market crash it could take all sectors of the stock market down during the run down. The safest investment over the next year will be holding physical gold and silver - not gold and silver stocks.

Rude Reader Jim Ledasil had this to say…

I found your comments very interesting today regarding looking at the reverse view of your investing inclinations as part of a decision making strategy. It sure helps to see the opposite arguments as a confirmation of your choices.

As to your question about the current state of the economy, in my humble opinion we are nowhere near the bottom. The derivatives market issue alone scares me to death, and if it unravels fully, depression will surely follow. I also firmly believe we have not seen the worst of the banking and financial market problems.

I’ll feel better when the government starts arresting en masse the bums who have been cheating us all with their unscrupulous practices in the financial markets while executives cast a blind eye to them in the name of profit. It’s not enough that the problems are exposed. We need to punish the individuals responsible.

I also am absolutely baffled by the musings of several automotive industry executives trying to put a positive spin on the condition of their respective companies. GM is the best example of spin I have ever seen. I cannot see them surviving the next year without bankruptcy, yet their leadership talks about giant improvements. This will cause shock waves in every thing from the credit markets, to the pension guarantee arm of the fed.

We’re nowhere near the bottom. But do not despair, there are always bright spots to find in all the craziness. The awesome power of the American economy has so many sectors in the process of revolutionary changes that we will prevail. Energy, infrastructure, and bio/pharma will lead us out of the morass. We simply have to demand the end of the giveaway of America from our leadership.

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And finally, Reader Robert Field wrote in to say…

Thanks for the nice article on energy saving companies. Check out International Power Group Worldwide (IPWG).

They manufacture two products that help with energy conservation. One is a waste heat recovery turbine for smokestacks that operate on low temperature differentials and generate about 20% of the waste heat into electricity.

Another product is a very clean waste-to-power incineration system. This is patented and they own the patent. It is virtually clean waste exhaust and reduces landfill waste to ash that is about 10% of the mass. All the while making electricity and distilled water. When in full operation it needs a fair bit of water but what it produces is about 250,000 gallons of distilled clean water as its by-product.

I’ve watched the naked short sellers take this company down to less than 10 cents per share. I think that it should be going to the moon but earnings have been poor. Check it out and see what you think. Thanks for the valuable info you share.

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[Rude Endnote: Just before you get going today, be sure to take a look at Dan Amoss’ Strategic Short Report, currently at a steep discount to the regular subscription fee. Dan’s been bang on the money so far this year, as the following satisfied readers attest:

“As a Lehman Alumn I was hesitant to put this one on…a cool $200,000 profit later I am a SSR disciple! Hanes looks like it’s next. Spectacular call on Lehman. Keep ‘em coming.”  — WIL
 
“First, I’ve only been with you for a few months, but I’m glad I joined. I’m now an AFR member, so I’m with you for life. You reports have been fantastic and, so far, all of them money-makers. I cashed out half of my HBIVF position when it peaked up to almost 80%. A few weeks ago. All in all, it looks like I average somewhere around 77-78% gain on the trade. I’m a happy investor.” — Warren C.

“I just wanted to thank Dan Amoss for the strategic short report letter. After recently closing out my second half of the Lehman put, I have a scored a personal rate of return of 342%!!!! This is in addition to the average of 72% so far on his other recommendations. I am a reserve member and this newsletter has been the most consistently profitable of all the letters. I am VERY pleased!

“Thanks so much, Dan. This one newsletter has actually paid for my entire membership fee for the reserve membership. If you are ever in Medford, Oregon, look me up. Dinner is on me.” — Pedro B. MD

And there you have it. I can’t say it any better than his own readers, so I’ll leave it there. If you’re interested in jumping on board Dan’s service in time for the next trade, read on here

As always, thanks for all the mail that pours in. We can’t publish it all, of course, but we read each and every one. If you haven’t already dropped us a line, you can do so at the address below.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com