Investors Chase Phantoms
Aug 22, 2008
In football, when a running
back intends to cut to the left, he often first fakes right.
This move is designed to make the defense commit their resources
in the wrong direction. It is my experience that markets often
follow a similar path. Just prior to a major move in one direction,
markets often make a sharp move in the opposite direction first.
With respect to the dollar, gold, oil and other commodities,
many on Wall Street have bought into the head fake, and will
soon be watching in amazement as the runner sprints to the end
Over the last few months, as the dollar rose more than 10% against
a basket of other currencies, and as gold and oil sank to multi-month
lows, many investors concluded that a threshold had been crossed,
and that the bearish trend for the dollar and the bullish trends
for commodities had finally come to an end. But rather than representing
a sea change, these counter trend moves more likely signify that
the established trends are about to kick it into a whole new
gear. My take is that if you thought you had seen a bear market
in the dollar and bull market in gold, oil, and other commodities,
well, "you ain't seen nothing yet."
Corrections are often vicious, designed to shake loose as many
investors as possible prior to a major move. The best bull markets
carry as little excess baggage as possible. With few speculators
on board to sell into every rally, the true believers who remain
can receive the full benefit of a fundamental upswing.
Violent downward moves also force out those that were too highly
leveraged, or those who showed up late to the party with little
understanding of the true fundamentals. Those who panicked and
jumped out too low often scramble to reestablish positions at
higher prices, further fueling the bull market.
This recent correction saw the most dramatic change in sentiment
that I have ever witnessed. But the head fake that caused the
market to commit was in fact not worthy of a high school benchwarmer.
With absolutely no significant developments that could explain
either a top in the dollar, or a bottom in commodities, investors
placed their faith in price movements alone. Once
the numbers started to show some retrograde motion, everyone
simply assumed that a real change had taken place, and the momentum
buying and selling began. The rapid movement reveals how clueless
participants in these trades had become. Even those fund managers
that seem to understand the fundamentals were fooled by the sharp
price movements and the rhetoric they spawned.
Lacking any real change in fundamentals, such abrupt changes
in sentiment following extreme price swings are as bullish a
sign as I have ever seen. There is absolutely no basis
for a significant dollar rally, or further weakness in gold,
oil, or other commodities.
The U.S. is the focal point of the world's financial turmoil.
We convinced creditors around the globe into loaning us trillions
of dollars. Now that it's becoming increasingly apparent we cannot
pay the money back, Wall Street has concocted a scenario where
our shell shocked creditors respond by loaning us even more.
More alarming is that many brain dead investors see this as a
The fact is that the outlook for the dollar has never been bleaker
and the prospects for gold and other commodities have never been
brighter. The rationale for a new dollar bull market, or bear
markets in commodities, is just as flawed as those used to justify
investments in internet stocks and subprime mortgages. Interestingly
enough, it's mostly the same suspects advancing the arguments.
For a more in depth analysis
of our financial problems and the inherent dangers they pose
for the U.S. economy and U.S. dollar denominated investments,
read my book "Crash Proof: How to Profit from the Coming
Economic Collapse." Click here
to buy a copy today.
More importantly, don't wait for reality
to set in. Protect your wealth and preserve your purchasing power
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Aug 22, 2008
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.