Time to buy... sequel
Since the "Time
to Buy" article appeared on 19th May, the precious metal
share markets have rallied strongly, and have now made 9 straight
days of gains - an unusual occurrence, and the dollar has just
broken down from its 3-month uptrend.
The answers to the question "What next?" depend on what time frame is being considered, and are a function of the outlook for the dollar. I believe it is most practical to consider 2 time periods: short-term, by which I mean anything from a few days to a week or two at most, and medium-term, which is anything beyond that up to 3 or 4 months.
Looking at a 6-month chart
for the dollar, we see that it has just broken down from a rising
wedge formation. This wedge was a bearish pattern, which signalled
that the uptrend was weakening, and that a breakdown and subsequent
sharp decline would be the likely outcome. The advance in the
dollar from February was a bear market rally within a primary
downtrend, highlighted on the chart by the still falling (red)
200-day moving average, that served to completely unwind the
oversold condition that had developed early in the year, and
reverse the excessively bearish sentiment that prevailed at that
time. Normally when prices break down from a rising wedge they
waste little time before going right back where they came from,
and lower, meaning that we can expect the dollar to head for
84 again quite swiftly, once the nearby support evident on the
chart has failed.
There have been some very important fundamental developments over the past week or two, following a period of extreme uncertainty across many markets, and the "Time to Buy" article was written the moment I detected the birth of the new uptrend in the PM markets. Not the least of these developments was the nomination of Mr Greenspan for another 4-year term at the Fed, apparently after he had undertaken to keep manning the pumps. What this means is continuing liquidity, regardless of the consequences, and increasing inflation, possibly eventual hyperinflation. While this is not exactly good news in the general sense, unless you are thinking of the period between now and the election, it is certainly good news for the precious metals and PM stocks, as the continuing expansion of liquidity, which feeds inflation, coupled with a reluctance to raise rates in a very fragile economic environment and in an election year, will dig a deep hole under the dollar and are a confluence of circumstances that should act like "rocket fuel" for inflation hedges with intrinsic value such as the precious metals.
The "shopping list" of promising stocks in the American, Australian and Canadian markets provided in the version of the earlier "Time to Buy" article - that appeared for subscribers on my website - remains valid, especially if we see a minor reaction in coming days, affording better prices.
[You can subscribe here].
27 May, 2004
website at clivemaund.com