Gold, Crude Oil, Resources Bull Markets NOT Over!
Commodities / Resources Investing Aug 22, 2008 - 12:55 AM
Larry Edelson writes: Gold continued to drop earlier this week, breaking below $800 an ounce, falling to as low as $780. How much lower will it go? Does the decline mean the bull market in gold is over? What significance does gold's decline have for inflation, the dollar, and the natural resource markets?
These are all questions on investors' minds right now, and I'll answer them for you.
First, let me state emphatically, and for the record — gold's bull market is NOT over. No way, no how.
Second, crude oil's bull market is NOT over.
Third, the natural resource bull market is NOT over.
Fourth, inflation has NOT peaked.
Fifth, the financial crisis affecting the U.S. economy is far from over.
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| Demand for gold all over the globe remains robust. |
And last but not least, no way is the dollar's bear market over.
I sound pretty confident, right? Now I'll explain why. Let's start with the main force at work ...
The Fundamentals Underlying the Dollar's Bear Market Have Not Changed One Iota
The financial crisis continues unabated, as you can see from the major hits financial stocks have taken recently; big names like Wachovia, JP Morgan, and even Goldman Sachs, financial institutions whose share prices have plunged as much as 12% from recent highs.
Moreover, more bad loan write-offs are coming. July's home foreclosures jumped an astounding 55%, while actual property seizures by banks surged 184%. Most of the losses that will come from July's terrible real estate market have not yet been reflected in write-offs.
So far, financial institutions have lost an estimated $500 billion. Even the conservative International Monetary Fund (IMF) says there's another $500 billion in losses to be recognized. So at best, the crisis is only half way over.
That tells me that the Fed and Treasury ...
Will have to pump more money into the economy, and
Bail out more institutions.
It also means that ...
The Federal budget deficit is likely to explode even higher than the current estimate of a record $500 billion for 2009, as tax receipts fall and spending is ramped up.
Indeed, few people are talking about it, but Congress just raised the national Federal debt ceiling, which is the accumulated budget deficits, to a record $10.5 TRILLION!
On top of all this, we are just now seeing official economic stats turn south in everything from retail sales, to durable goods orders, industrial production, and more.
The trend down for the economy is so powerful that Washington can no longer jerry-rig the numbers. The rot is now coming to the surface.
What about Europe, where GDP has already contracted, and the euro is falling? Won't the now weakening euro prop up the dollar?
I don't believe so. From all my studies and indicators, I believe the U.S. economy is in far worse shape than Europe's or Britain's.
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| The euro's pullback is only temporary — and so is the dollar's recent bounce. |
Moreover, my technical studies indicate that the pull back in the euro, just like the one in gold, is merely a pull back, and nothing more. In the dollar's case, I also believe that its bounce is mostly technical in nature, plus some dollar-safety buying due to the recent armed conflict between Russia and Georgia.
Bottom line for the buck: All of my indicators suggest its rally is merely short term, nearly over, and that the long-term trend for the dollar remains DOWN.
The Fundamentals Underlying the Long-Term Bull Market in Gold Have Not Changed Either
First, you have the dollar . Once its near-term rally tops out, which could be any day, and the greenback resumes its long-term decline, gold will begin its next phase up.
Second, demand for gold all over the world remains robust. So much so that second-quarter gold demand hit a record $21.2 billion by value — 9% above the second quarter of 2007.
This shows that despite the record high quarterly price of gold, investors are still buying up the precious metal. Investment demand led the way higher, jumping a huge 29% to $3.5 billion — with the most notable increase coming from China, the U.S. and Egypt.
We have seen some short-term softening of demand in India, but that's about it. In almost all other regions, gold demand is at or near record highs.
Third, gold supplies are falling. South African gold production dropped a stunning 12.3% in June, the latest data available. Meanwhile, net central bank sales are slowing and are on target to be the lowest since 1999. Both are bullish for gold.
Much the same can be said for oil and many other natural resources. Demand remains vibrant, supplies tight, and the currency of commodities — the dollar — in a long-term bear market.
What About the Supposed Softening of Asian Economies?
Well, I'm here in Asia now and I don't see much of a slowdown. There is some slowing in Singapore, Hong Kong and Thailand, but none that I can see in China.
Indeed, China's retail sales for July exploded to a NINE-YEAR high, soaring more than 23%! Fixed asset investment rose 27.3% in the first seven months of this year, compared to 26.8% last year. Industrial output slowed a tad due to factories closing in Beijing for the Olympics, but still ran at a very high growth pace of 17.4%.
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| China's export growth is still red-hot with a first half trade surplus of more than $99 billion. |
Additionally, export growth is still running at more than 21% ... and China's first half trade surplus, though down a bit, is still running at a red-hot rate of more than $99 billion.
Meanwhile, gross domestic product (GDP) growth eased to 10.1% in the second quarter from 10.6% in the first three months this year, amid expectations of the slowdown worsening.
Moreover, China's first half '08 growth came in at a whopping 10.4%, down only a tad from last year, and well ahead of growth expectations in the 9% range.
My view: China's growth is about to accelerate higher yet again (pulling up the rest of Asia) for the following reasons ...
One, Beijing does not want the usual post-Olympic slowdown to occur. So they are going to do everything in their power to avoid it.
Two, in several recent press conferences, Beijing's leaders have hinted at a loosening of policy by taking the pressure off the brakes they applied last year to the economy. In the cards, a possible cut in bank reserve ratios and the Bank of China selling yuan to push the currency back down.
Three, China's stock market seems to have had its previous year's excesses wrung out of it. As you know from previous issues, I believe China's stock market is one of the best buys on the planet right now and I have not changed that view.
Bottom Line: I Believe the Pause In the Natural Resource Bull Markets Is Very Close To, or Even at Its End.
That includes the declines we've seen in gold ... in oil ... in agricultural commodities and more.
There may be a bit more bottoming ahead. But if you're a savvy investor, you'll recognize the recent action for what it is — a correction in a long-term bull market, and nothing more.
My recommendations: If you're not already invested in the natural resource markets, now is a great time to consider buying. And if you are invested, now is a great time to think about adding to positions.
Specifically, I suggest ...
Buying gold through the SPDR Gold Trust (GLD) , an exchange traded fund (ETF), and gold stocks via mutual funds like the Tocqueville Gold Fund (TGLDX) or the Market Vectors Gold Miners ETF (GDX) .
Buying China through an ETF like the iShares FTSE/Xinhua China 25 Index (FXI).
Buying oil via the United States Oil Fund ETF (USO) which tracks the price of oil, and a solid oil fund like the Fidelity Select Energy Fund (FSENX).
Buying diversified natural resources through a fund like U.S. Global Investors Global Resources (PSPFX).
Best wishes,
Larry
P.S. If you're a Real Wealth Report s ubscriber, be on the lookout for a new round of even greater profit opportunities in natural resources!
If you're not a subscriber, not to worry. You can join Real Wealth Report now for a modest $99 — that's peanuts when you consider the profit potential.
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