This is a follow up to the Q1 2009 Summary On Gold And Various Markets issued on March 31, 2009
In the first quarter of 2009, we reached the climax of U.S. banking collapse. Global central banks hurried to apply fiscal and monetary stimulus, including unconventional "Quantitative Easing," which entailed the printing of over $1.5 trillion to buy troubled mortgage and derivative assets. Our conclusion then was "In Q1 we likely saw the peak of the dollar. Mr. Bernanke and Mr. Obama continued with hyper-inflationary fiscal and monetary policies which will spark the resumption of commodity bull. Asian markets are breaking away from U.S. equities, this is what we anticipated. I look to accelerated global recovery and volatile markets, with positive uptrend ahead. "
Back in March, we were quite possibly the only optimist calling for the recovery in the equity markets. The following charts demonstrate we should have been more bullish!
So what's in store for the rest of 2009?
We said in March:
"Fiscal deficits and record low rates will further provide momentum for gold. The chance of reaching past $1,000/oz has been further bolstered by oil's strong comeback at $50. For Q2 I look for range bound between $850/oz and $1,000/oz."
Gold indeed took a breather while allowing commodity and equity markets to catch up. Now with crisis talk receding, inflation and deficit concerns will return to center stage. I look for gold to first break out of $950 by September, and rocket past $1,000 by end of October. Technically the above bullish reverse head-and-shoulder pattern predicts a peak for 2009 of $1,300-$1,500/oz
In March we said:
"The dollar performed its best act and was squeezed to 89 before long term poor fundamentals come back in to play. I look for a dollar correction that will take the index back 80 in Q2 and 75 in 2009."
Our call on the dollar was spot on. The dollar looks to have just broken down from the bearish head-of-shoulder formation, this means dollar is going down further to 75 shortly. Because strengthening Asian currencies (other than the yen) are not in the dollar index basket, I am not as bearish as other analysts on the dollar index and would peg my conservative low target of 70 in 2009.
We said in March:
"S&P500 staged a panic bottom in Q1 from banking crisis and is back trading above 800 level. With zero% interest rate and vast money looking for a home, we are neutral to mildly positive on the index. "
Back then we drew 1,000 as being the upside mark. The index reached that target with ease in July. Since the fundamentals for the U.S. economy has not improved at all with double digit unemployment rate, this liquidity driven rally could take a breather before the next advance. I look for index to be range-bound between 900 to 1,150 for 2009. The lower the dollar goes, the higher S&P500 will be.
We said in March:
"The XAU zoomed to 140 in Q1, which is quite extraordinary given the extremely poor climate in equity markets. There is a lot of resistance ahead at 150 which will likely cap the index for Q2 while base metal and energy sectors play catch up. "
XAU matched our call for Q2 as it zig-zag'ed its way to 150. With gold primed for a major breakout, XAU presents the lowest-risk entry point for the year. I look for the index to take out 150 by September, with first target being 170, then 200 by year end. I have a feeling the 200 target could be conservative.
Oil and Copper:
In March we said:
"In Q1, China started stockpiling base metals and energy markets started to return to normalcy from extreme margin selloff. Remember, commodity prices go up regardless of economic activities in times of inflation, just ask the Zimbabweans with 85% unemployment and a loaf of bread costing 1 trillion Zimbabwean dollars.
Base metals and oil have staged very healthy gains in Q1, prompting us to possibly raise our above target for the year. For Q2, oil is likely to be between $40 and $60, while copper stays between $1.75 - $2.25 "
It turned out we were conservative in our already optimistic call for oil and copper. Given those two growth commodities have doubled from the 2009, I would be cautious to step in at this point. The lows I see for oil is $50's and for copper is low $2's. I am cashing out copper producers, rotating to gold and copper juniors companies.
S&P TSX Ventures Index (Proxy to Junior Mining Stocks):
We said in March:
"Our call here has been mostly correct. I am mildly surprised by the relative strong performance of the junior resource sector in Q1 (up 35%). While I don't see much downside as value plays abound, note there is strong resistance at 1,000. "
Investors snatched up bargains in the junior sector, which helped propel the index to 1,200. Lots of analysts are recommending taking profits out of the juniors. If copper nickel and gold stay above $2 and $6 and $900 respectively, we won't see any prolonged correction in the junior sector as there are still many bargains that are 50%-70% off from 2008 peak. I think a better strategy is to keep a good portion of funds and rotate positions within juniors. My conservative target for the index is 1,500 by year end.
Global Equities (using Shanghai Stock Exchange Index as Proxy) :
I said in March
"Shanghai rebounded 25% alone in Q1, faster that I anticipated. The index has de-coupled from the U.S. equity markets and the chart is very bullish. I would raise my target for the index to 3,000 for the year. Buoyant Asian equities will have a positive impact on commodity prices."
Again I was being too modest with my forecast. China is the most populist country and is the world's third largest economy, so the doubling of Shanghai stock exchange from its Oct low is no small feast. While I don't see any severe prolonged correction, the chart indicates congestion between 3,500 and 4,000, which is now my upside target for 2009.
We are Entering a New Renaissance:
With the talk of financial crisis receding, the focus will be back on the dollar. The U.S. budget deficit is projected to reach $2 trillion in 2010. As the generation of baby boomers enters the entitlement phase, the deficit will only likely to go higher. Medicare spending for the first time exceeded contribution, and the Medicare trust fund became a net seller of U.S. treasury instead of being a contributor. While the budget deficit situation is alarming, what concerns me the most is the waning appetite of foreign investors on dollar debts. Dollar debts owned by foreign investors currently stand at over $12 trillion. China, Brazil, India, and Russian are explicitly warning U.S. to reign in deficits to save the dollar. I wonder when their patience will run out.
The dollar standard lasted 4 decades and channeled 70% of the world's resources and investment to America, a country with 5% of the world population.
The jettison of the dollar standard will ensure uniformed distribution of wealth and investment throughout the world. I would boldly state that the global growth will accelerate as we enter a new renaissance with industrial and hi-tech revolution that will put the 1900's industrial revolution to shame.
What To Do Now?
In my June article titled "How Equity And Currency Markets Behave After Financial Crisis" (http://new.goldmau.com/article.php?id=1816) I stated that hoarding dollars after a debt crisis is the worst strategy. There is still time to diversify. Sign up for our newsletter package at GoldMau.com, and the independent thinkers such Lawrence Roulston and Aden sisters will share their views on how to come out ahead.
ABOUT THE AUTHOR
John Lee, Mau Capital Management
John Lee is the founder and principal of Mau Capital Management and the portfolio manager of a mining equity hedge fund. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. Mr. Lee has a keen interest in the history of money and economics, and has previously studied under Mr. James Turk, a renowned authority on the gold market.
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