Markets dominated by changing correlations

Thursday, April 14, 2005

The risk in equity markets shifts to the downside. Stocks took a beating on Wednesday after abysmal retail sales figures detached Wall Street from its inverse correlation with oil prices. Well, even at 50 $ per barrel the black gold is still some 20 percent higher than only a month ago. The very fast slide from 58 to 50 $ with a growing number of speculative short positions in the oil markets makes one think that this more than welcome move on the downside is rather to be seen as a swift technical correction in an otherwise demand driven oil market. The lowering of consumption estimates by the IEA (International Energy Agency) smells too much of politics by the western oil junkies.

A look at the number of Chinese and Indians who are going to spend their money on motorized vehicles is a good indicator where any oversupply will vaporize instantly. And the 2 million barrels Iraq pumped before the war will not come that fast online, given the steady rise of attacks on Iraqi oil installations. Including the daily 170 million $ war-subsidy Iraqi oil is certainly a premium price product anyway.
But the investors world has become a foggy place where the officers at the helms of central banks encounter icebergs of inflation. As the Fed put it only the day before, inflation seems to be contained because energy prices have not been endangering the long-term expectations. The IEA contradicted this statement on Wednesday. In their view oil prices will retreat as inflation burdens consumers so much that they are likely to reduce oil consumption to pay other steeply rising bills first.
Treasuries offered a mixed, but slightly positive picture after the terrible retail sales figures that will impede the Fed's plan to keep the "measured" pace of rate rises intact. After all, this could suffocate the fragile upturn of Wall Street as it also faces the high hurdle of much slower profit growth than in 2004. They used up their ammunition four years ago and now face the Japanese dilemma of slowing growth that can't be stimulated by lowering rates because that would be another nail in the dollars coffin.
As the word inflation grows bigger and bigger the prudent investor is looking for cover. At least gold didn't cave in to all the bad news from the price front and the surprisingly stubborn backed-by-nothing $.
This stability seems to have been overlooked in the sector of mining shares. The index of unhedged gold producers fared even worse than the overall market with a decline of more than 2 percent. Another correlation going missing though the fundamentals remain the same.
It is prudent to forecast that this is only the beginning of fundamental shifts in the investment markets. No stone will be left unturned when investors will look for a safe place for their savings.
Do you remember the standard recommendation for conservative (prudent) investors: Put 10 percent of your assets into gold. I doubt that US investors overall have more than one percent of their assets invested in physical bullion gold. See the S&P 500 falling below 900 points and that rule might become fashionable again. Americans competing with Chinese and Indians for the gold reserves of the world might initiate a super-spike that will lead the only currency with lasting value into 4-digit price levels. After all, the stabilizing factor in gold is its limited supply - in contrast to $ which can be printed as long as the world does not run out of ink and paper.
When gold touched 850 $ in January 1980 (inflation was around 16 percent then) people queued around those banks selling the yellow metal. It ain't be different this time, when people lose the trust into the greenback and the Euro and the Yen as all three are burdened by high unemployment and negligible growth rates in their respective areas.
It is therefore not unlikely that gold mining shares will see a bull market that will brightly outshine the rise of energy stocks over the past 12 months. A current sector market capitalization of certainly not more than 150 billion $ including all the junior miners will result in an accelerated climb of these shares once the big funds will come and want their share of the gold action. My advice: Position yourself now as the prudent investor likes to buy low and sell high. But stay away from the promise plays and keep to those companies already mining gold or coming up with their first pour shortly. There are quite a good number of gold shell companies listed that are full of plans and ideas only. They are called explorers in contrast to producers. And never forget: Because of the relative tightness of the sector it will be prone to manipulative attacks. But the 6000 year old universal currency will weather these short-terms without any further setbacks, I am convinced.

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