Wednesday, July 1, 2009

7 / 1 / 2009

No changes in this market yet. The Dow Jones is still in the the grips of wealthy hedge fund managers who, lacking any real desire to evaluate discrete issues or sectors they view as momentum plays, are now satisfied moving large sums back and forth along the Dow Jones Index. Everyday these professionals show up and say "You have to be in this market and trade it.", referring to the myriad equity index trading instruments. They don't know when a turn up or down is coming, and so they are left protecting principal and speculating on daily moves. Clearly lacking in this market is position trading and investing.

One subject I happen to watch closely, but avoid spending too much time on is Gold. To me, gold is simply a hedge against loss of value in your currency of choice. Do you think the government is printing too much money? Do you think that the money supply is increasing? Do you think that interest rates are too low? Any one of these is a reason to own gold. But own it, do not trade it. Gold seems to be second to oil, the most manipulated commodity, in volatility on a week to week basis.

Lately the trading of this commodity is giving me great concern. Gold's action is a great indicator of future economic condition. And its action suggests great uncertainty in our economic near future with a very strong negative long term bias.

Beginning with a look at the 5 year gold chart an amateur can see we are still in the first leg of a Bull market in gold. That's bad for the economy. It says that investment professionals don't trust the future of the world and US economy to create value. As a market analyst with an investment banking back ground I learned early on that the only thing protecting an equity issue in the public market is its underlying value by fundamental standards. After the honeymoon and the speculation surge of an IPO, unless the company can produce stable earnings results, the value must ultimately go down. Gold is like the post IPO perspective on the world and US economy. Except that it rises inversely to prosperity. It speaks for itself in its value against the US dollar / US economy - here's a link to the 10 year chart against the dollar. If you are looking for expert perspective on the US economy, click on it or copy it into your browser window.

Financial writers have it easy. We have 360 days a year and myriad statistics to include or exclude in making our ultimate argument. I could very easily argue that the rise in gold is due to a dynamic industrial world that, driven by greater numbers of participants, primarily China and India, a gold shortage exists that production has yet to catch up with. And the supply and demand imbalance has created Gold's 10 year climb.

But that's not how I see it. What I see is the result of the US economy growing by virtue of financial leverage and cost cutting measures that have created little additional value since 2005 but at the same time created huge amounts of leverage.
Industrial production, which creates real value, continues to be imported by the US in exchange for US currency. US currency value continues to erode because its value is based upon the US economy's overall ability to repay the government's debt. That amount owed is offset by the US government's ability to repay loans through intl. treasury auctions that raise money to repay old loans and interest owed. Each time this occurs, money being borrowed to repay borrowed loans in conjunction with an economy that is creating less value during that time period the value of the dollar is dilluted and the US economy takes on more real leverage.

I have read that the value of an ounce of gold will eventually cross the value of the Dow Jones Index. I have heard ranges between 2500 and 6500. Either way its Armageddon if it occurs, and I for one do not agree that it will ever happen. My optimistic view is that ultimately the dollar will weaken to the point that manufacturing and industrial production increase in the US so value can be created which suggests more than a recession recovery. That will be a valuation overhaul and ultimately the restructuring of the US economy we desperately need.

Build Value Every Day

Brad van Siclen

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