Bull Market Reset
Source: James West, Midas Letter (10/14/08)
". . .considering the banking system’s response to the evaporation of ersatz liquidity with exponentially more of the same, the bubbleomic boom and bust phases will be the legacy of such ham fisted fiscal policy."
Doug Casey, another famous newsletter writer, likes to point out that the Chinese symbol for “crisis” also means “opportunity”. If ever there was a chance to put that theory to the test, now is it.
Here’s where opportunity is going to present itself in the ensuing chapters of our financial de-evolution.
First of all, it's key to understand that the Federal Reserve Board of the United States is essentially fabricating money out of thin air to inject “liquidity” into the credit system. The market’s reaction to the announcement that the Fed was going to replace the banks in the short term commercial credit market is just the lubricant required to solidify the impression that the commercial infrastructure through which all goods move will continue to function, rendering the predictions about complete food system collapses irrelevant….for now.
However, in that this imaginary cash that is providing the liquidity has essentially the effect of further eroding U.S. dollar purchasing power, the opportunity here is the dollar-negative gold-positive influence of such moves.
Right now, the dollar is looking strong because of the massive repatriation of U.S. dollars now underway as a result of global U.S. denominated asset de-leveraging. So it looks like the dollar is strengthening. This is however a temporary illusion, and the fact is that this is a perfect opportunity to unload U.S. dollars and everything denominated in same. When the export of dollars to the U.S. eases, the greenback will plunge.
As all of the world’s currencies weaken in tandem with the U.S., since they are all tied to some degree to that ailing foreign reserve standard, gold will slowly at first, and then suddenly, surge into new record territory. These are the events that have irrevocably set the stage for $2,000 gold, and though many skeptics may marvel at the audaciousness of this sentiment still being echoed after all these years, it is now imminent and definite.
So the first great opportunity presented by this crisis, besides the last minute premium available for USD, is in physical gold. Not only is this the best strategy for capital preservation versus holding cash, it’s the next great opportunity to buy low and sell high.
There will be the usual resistance to swapping cash for gold on the part of mainstream investing America, and as usual, Americans will be the last to cotton on to the fact that all of the anti-gold messaging they’ve been spoon fed over the last decade is actually just an exit strategy for the cannibals of Wall Street.
But once the broad retail market understands that gold is the only game in town as far as value stores are concerned, the demand and flight to it will start to form a new bubble driven by fear.
Buyers of gold below $1,000 an ounce now will see their money double within 18 months, at which time, if not sooner, it will be time to take profit from the physical in time to ride the next bull, which will be in the producing gold companies. If you were extremely liquid, it would be a great time to start acquiring producers, but the immediate term opportunity is in the physical. And this does NOT include ETF’s. In this environment, and with all of the murky connections among banks, funds and insurers, you want to be sure you’re holdings can’t be part of some other weak institutions liquidation sale.
If you don’t want to have gold hidden on your premises, consider fractional bar ownership with a trusted provider of vaulting services. My recommendation is anywhere except within the United States.
Once the physical metal is bid up to astronomical proportions, and it will ultimately be over-bought, then the slowest herd mentality investors will crowd in and provide the exit for the early birds.
Then they will crowd into the producers, and the net effect of that stampede will be to return interest to the junior explorers – especially those with high quality, nearer term projects, strong cash positions, and sound management.
Then there are the two phases of consolidation ahead.
The first, which could conceivably start with the onset of the gold bull market, will see cashed up juniors start to swallow market decapitated fellow juniors. There is already clear evidence of this happening, as discussions are underway at some of the Canadian investment banks with the stronger junior companies they’ve financed.
Phase two will see mid-tier producers swallowing juniors, and senior producers swallowing mid-tiers. This is the best scenario for nimble investors to profit while others sit on the fence and watch their cash depreciate.
At any rate, timing will be key. Now is the time to start buying the stronger juniors with plump balance sheets and dynamic management. Expect to hold them for 24 months or more, but the reward for your patience will be a healthy return on your investment.