This is an interesting time for global markets. The Nikkei followed up yesterday’s sell-off with an even bigger 11% plunge today. The Yen, however, is rising in the midst of this panic. Capital is repatriating to Japan and this is going to make their crisis even worse. The U.S. equity market is also coming under pressure, which was long overdue. I noted a couple of weeks ago that I had modest put/short positions on the market. Although I am short-term bearish, I will be looking for an opening to buy. Quantitative easing is part of our foreseeable future and this totally changes the dynamic of the stock market. Oversimplified comparisons to the Great Depression are just not applicable.
The recent sell-off in gold is mildly confusing given the growing uncertainty worldwide. However, it is not unusual for gold to get unjustifiably punished in the initial stages of a panic. 2008 is a great example. Investors needed to raise capital any way possible, and they did it by selling an asset that should have risen in a panic. The rally that ensued in gold after the initial panic was dramatic even as stocks made new lows. Markets will always adjust to reflect true conditions. I am drawing an initial line in the sand at $1380 and taking it from there.
I’ve realized over the years that the way I think about the gold market is very different from most gold bugs. Fundamentally this stems from my long-term investment outlook. The gold bug community in general seems to be very anxious to see gold trading at $2000 and above. In contrast, I am very patient in seeing this bull market through. It goes against our intuition, but corrections and consolidations are very bullish indicators. A bull market needs time to build a strong base to rise from. Multiple failures to breach resistance need to be viewed by the general community as bearish indicators. You need people to talk about head and shoulders patterns and triple tops for a big move to develop. You need the shorts to pile on. Sentiment needs to be weak. This is just the way bull markets work. Honestly, I would rather see $1200 gold than $1500 right now.
I always try to point out that every economic environment is different and that rigid comparisons to the past are usually wrong. For example, why is the Yen rising in such an obvious “negative Yen” environment? Weak economy does not always equal weak currency. This is the same kind of paradox that will befuddle the masses as stocks in the U.S. rise in a weak economic environment. Capital will flow out of the U.S. because the investment opportunities are looking bleaker by the day as politicians continue to ignore this monumental debt crisis. Gold will rise right along with interest rates, confusing those who believe in an inverse relationship between the two. These will be fun times for those who understand the trends that are developing.
This is a time to be very patient as events unfold. Treasuries are getting a bid here and this will provide an opportunity to get short. Stocks and gold are correcting; this will present an opportunity to get long. I sense that the general investing community is very down on gold at this point in time. I’m not sure exactly when it will happen, but gold is going to experience another moonshot move. My genuine hope is for a panic sell-off in gold to occur in the midst of unsustainable deficits and flailing confidence. If this does occur, I believe it will be the last great opportunity to load up before the really monster rally begins.
Source:Welcoming a Gold Correction