A Look into 2005
January 19th 2005
posted January 27, 2005
Well here we are at the beginning
of 2005. I like to write my yearly forecast essay a few weeks
into the New Year, so I can read everything I can get my hands
on from all the mainstream financial newspapers and also from
some of my most favorite private newsletters.
I do this so I can give my
readers a large perspective on what the mainstream is saying
and also what the real savvy grizzled financial players are saying
about what to look for in 2005.
Last year was an interesting year in the financial markets. You
had the major U.S markets down all year until the post election
really took the DJIA, S&P500, and the NASDAQ into positive
territory to finish the year slightly up. You had gold and silver
move higher as well, with silver out performing gold and both
outperforming the DJIA. You had the Fed raise rates from 1% to
2.25% for a 125% increase but the yield on the U.S. Ten year
bond actually finished the year pretty much the same around the
4.3% level and on Friday Jan 14 the yield on the 10 year was
The main reason for the yield on the 10 year bonds to remain
so low was massive buying from Asian central banks, mostly from
china and Japan. Without these two countries supporting the 10
year, the yields would have gone up in a big way. But the real
story of 2004 in my opinion was the energy markets. Oh yes you
might be saying to yourself, oil hit a high of over $55 a barrel.
Yes this is true and some oil
stocks did real well but the real story within the energy markets
was the explosion in uranium and coal stocks. Up here were I
am from in Canada you had simply an amazing year in coal and
uranium stocks. Some of these stocks were up over 500% a few
even more than 1000%.
While the mainstream financial media was and still is talking
about Google and Apple's IPOD and how Google shares doubled in
price and the big comeback in tech stocks, a few very savvy investors
have been making a killing in what I expect to be the big winners
in this decade along with gold and silver stocks.
The thing to really look for
and monitor in 2005 will be uranium and energy stocks and the
price of the physical.
The story of Uranium and the worlds thirst for more electrical
power can be best summed up in Chinas attempt to build many new
nuclear reactors to power the countries vast energy demands as
hundreds of millions of people buy new cell phones, computers
and build massive factories that need lots of electricity to
Here is a quote from Canada's national newspaper the Globe
and Mail in a recent January 2005 article.
"China is growing rapidly
and is on the hunt for new natural resources, while Canada, eager
to stem a long-term decline in its share of global direct investment,
is anxious to attract foreign cash to develop its petroleum and
mineral assets. (Ottawa also wants to sell nuclear reactors to
the energy co-operation deal is not yet finalized and could be
delayed beyond Mr. Martin's China visit, which takes place Jan.
20 to 23.
the deal could also encourage collaboration on uranium, which
Canada sells and China needs to power its growing number of nuclear
reactors. It may also cover research on oil sands technology,
which Canadian firms use to extract petroleum from tarry deposits
in northern Alberta."
So you can clearly see that
there is a global build up of nuclear reactors as China and other
countries such as India need to use nuclear power plants to feed
a hunger for electricity and also stop the massive pollution
from fossil fuels as 7 of the most polluted cities in the world
are in China! And this is where the investment right now in companies
that have large reserves of uranium are so important to investors
looking to make a killing in the market.
I have covered the massively positive fundamentals for the uranium
market in an essay I wrote back on Sept
30 2004. Please go to my website if you are interested in
"The coming uranium boom" So in 2005 and for the better
part of this decade I would expect a boom in uranium and a massive
explosion in uranium stocks. As one of my most favorite markets
analysts Jim Dines is fond of saying:
"The public is totally
blind to the uranium story, this new bull market is completely
invisible to the mass public"
This means we are very, very
early in the uranium bull market. When the public and the people
who run hedge funds and mutual funds catch on to the coming uranium
boom the price of the uranium stocks will simply explode in price
to levels maybe never before seen in the stock market since march
So going into 2005 I am very bullish on uranium and of course
I am bullish on gold and silver. I have written about the positive
fundaments of both gold and silver in this decade as I believe
the factors that took gold to $850 in 1980 are 100 times better
today than then.
If this is true it is only
a matter of time until the market sees this and takes the price
of gold and silver to levels that today may be hard to believe
just like in 1990 where you had the NASDAQ at 400 and 10 years
later was hitting 5000. Today you have gold at slightly higher
than $400 but it would not surprise me to see gold well over
several thousand dollars in the next 10 years.
As for gold and silver I believe 2005 will be a great year. The
main catalyst that I am looking for to really get this bull market
going is a crash in the bond market and a big rise in yields
on the 10 year bond (which dictates mortgage rates). One of the
big misconceptions in the world is that rising interest rates
are bad for gold and silver. Well I don't have to remind most
gold investors that in 1980 when gold hit $850 interest rates
on the 10 year bond were over 10%. Today you would need a really
big crash in the bond market to get to those types of interest
rates. Look at the 40 year chart of the 10 Year yield below.
But what would cause this kind
of crash in the bond markets? Well the best answer to that question
is massive selling of American dollars and then American bonds
by Asian central banks (China/Japan). This topic has been covered
very extensively of late so I will not really elaborate too much
on this highly debated topic. The only thing I will say is that
Japan and China along with many other Asian countries have been
buying massive amounts of American debt and then dollars to buy
I really believe that these Asian countries are starting to realize
that America has a major fiscal and monetary problem and that
it is in there own self interest to diversify there holdings
of American debt. The big problem is that these countries have
been the only major buyer of dollars so if they start to sell
who the heck is going to buy all that debt from them? The answer
is no one, and if they do it will be at much lower prices sending
interest rates sky high to attract investors.
What will happen to the U.S. economy and stock market if interest
rates explode to the upside? Well it won't be pretty I'll tell
you that much! Here is the most major problem that a lot of people
don't realize. The U.S. government has cut taxes so much over
the last few years that they are really just betting that the
economy will expand and that people will spend and buy houses
(increasing house prices and hence higher property taxes) and
cars and that the tax revenue from increased spending will more
than offset the massive tax cuts to the public and corporations.
One small problem, what happens if interest rates go up and cause
a fall in house prices (decrees in property taxes) and a massive
cut back on spending from consumers to corporations (lower consumption
taxes) and a huge crash in the stock market (lower capital gains
taxes). The tax revenue that the U.S. government gets will fall
dramatically and in the end they will be forced to raise taxes
at a time of economic contraction to pay off there many creditors
(China/Japan). There simply will be no other option.
So going forward into 2005 I would watch the bond market very
closely to see if there is any breakdown on the 10 year bond
chart indicating higher interest rates. Below is a nice Point
and Figure chart of the 10 year bond yield, it has a very bullish
head and shoulders bottom pattern that is indicating higher interest
rates going forward.
And what do I see for the stock
market going forward in 2005. Well like I have talked about before
in past essays, everyone knows that for the last 100 years every
year ending in 5 was an up year for the DJIA some of them very
big years of 25%+ returns. To me this really is the only bullish
thing that the bull can really hang there hat on. There are simply
too many bearish things in the market right now that would indicate
a large move to the upside from here. In my opinion along with
many other market analysts who have been at this longer than
I have been alive, there are just too many things that are eerily
similar to the peak in early 2000; you could really classify
the 2002 to current rally as a classic echo bubble.
Here are a few examples. From June 1999 to May 2000 the fed raised
rates 6 times from 4.75% to 6.5% or 36%. This time in 2004 the
fed tightens again raising the fed funds rate five times from
1% to 2.25% or 125% over 6 months.
There had been massive action in the IPO market in 2004; in fact
the 21 offerings in the week of Dec 17, 2004 were the most IPOs
since August 2000. There were 216 offerings valued at $43 billion
making 2004 the biggest year for offerings since 2000. The total
is bigger than 2001, 2002, and 2003 combined. This is telling
me that speculation is entering into the market in a big way
Another thing that is pretty bearish is the level of insiders
that are selling stock and bailing out. In August of 2000 insider
selling crested with sales of $7.7 Billion, as average investors
were buying tech stocks like crazy the insiders of those companies
who knew better sold out right at the top. Well here we are again
in early 2005 and we start to understand that a few months ago
in November 2004 insider selling hit $6 billion, its highest
level since August 2000.
All of this is very bearish not to mention the record low VIX
and VXN readings that indicate a total lack of fear in the markets.
There have been two great essays recently that eloquently indicate
where we are currently in the markets and what to expect this
year and longer term. I would advise all of my readers to visit
Adam Hamilton's web site Zeal.com and read his current
essay "No fear in stocks 2" Mr. Hamilton is one of
my most favorite financial writers and this essay is very good.
The second essay is by another
one of my most respected market analysts Robert McHugh
he does an amazing job of showing his readers the similarities
of today's market moves and those of past market moves in 1972-73
and 1929. The similarities are very scary and very real. You
can read his most recent January essays at www.technicalindicatorindex.com
The last thing that I want to talk about is gold and silver stocks.
There has been a lot of talk in the gold camp about the year
long correction in the HUI and the XAU. As I will show below
in my charts I feel that we are about to break out of that consolidation
and really have a great year for gold and silver stocks. One
of the first things to say is that 2004 was a huge year for a
lot of gold and silver companies. A lot of companies got large
financings to help them further develop and explore their current
properties. It takes a while for all that extra paper to settle
down and get absorbed into the market.
But if in 2005 one of the many
companies finds a major deposit of either silver or gold it could
ignite a fire within the sector as people rush to buy gold and
silver stocks hoping to invest in one that could find a massive
elephant deposit. This is also true not only of gold and silver
companies but really of uranium exploration companies as well.
If one of the few Uranium Exploration companies that have been
recently financed goes out and finds a major uranium deposit,
their stock will explode to the upside raising multiples of the
So seeing a year long consolidation should not worry educated
gold investors. In fact we have seen this before! There was a
massive sideways consolidation in the HUI and the XAU back in
2002-2003 where the HUI hit 147 in early 2002 and did not get
above that level until a full year later when it finally broke
the 150 level on its way to 254 by late 2003. As you can see
below the exact same patter has been forming for the last year
just on a bigger scale (fractal basis). So this pattern should
break to the upside and provide huge gains in the HUI this year.
The second chart below is nice
3 year point and figure chart of the HUI. You can see a very
clear Elliott wave pattern here where the 4th wave is the head
of a massive year long Head and Shoulders reversal pattern with
is super bullish! I have put a multi year point and figure chart
of oil below the HUI chart to show the bullish aspects of head
and shoulders reversal patterns.
Do you see the way the patterns
in both charts are very similar. Look how they are formed and
the outcome of the price moves within the patterns. 2005 looks
to be a very good year if you are long stocks related to the
HUI and the XAU.
. . . .
Finally I will show 2 charts
of gold, the first one is a 3 year chart and the second is my
favorite 30+year gold chart that I always show to keep peoples
perspective on the gold market. Please remember this is a long
term secular bull in gold here. Gold is not going to $1000 next
week or even next year but it will go over $1000 by the end of
this decade. So if you have any sort of patience and foresight
minor market moves will not deter you from the ultimate outcome
and that is a massive wealth transfer to the few savvy people
that took the action in the early part of the 21st century and
bought gold, silver and uranium stocks when no one else wanted
them or even knew about them.
. . . .
Gold, Silver, Uranium, Oil, Coal.
Bonds, DJIA, S&P 500, NASDAQ.
Any comments or questions,
You can e-mail me at email@example.com
Or you can visit my website
lives in Vancouver B.C, Canada where he studies Elliott Wave
Theory and Classical Technical Analysis.
Edward Gofsky. All Rights Reserved.