Natural Disasters and Political Uncertainty


". . .cause investors to flee paper for precious metals."

Last week, the Japanese earthquake darkened the skies with an unexpected flock of black swans. On top of an act of nature, we have the persisting presence of eurozone debt fears, currency wars, the Middle East unrest and the near bankruptcy of many states in America. The Wisconsin problem goes far beyond one local state; there are 46 Wisconsins that have accumulated billions of dollars in deficits. States have more than trillions of dollars in pension obligations that they will be unable to pay. Unions are unwilling to budge and have taken to the streets in protest. Sheer survival mandates humongous cuts in spending. This places U.S. states between a rock and a hard place as they will have to incur serious job cuts with an already high unemployment rate.

This litany of woes has been compounded by the news out of Japan. Municipal bonds—once considered a sacrosanct safe haven—have been abandoned by the largest fixed-income fund, which sold out its holdings. The manager said he didn't want to stick around as he felt prices would decline. Astute investors are not seeking Treasuries or the U.S. dollar as a safe haven asset; instead, gold and silver are showing significant demand—especially on the physical side.

We are witnessing a crisis of accumulated crises. I have recommended precious metals, uranium and rare earths that can serve as safe havens in these gathering storms as both a hedge against a deteriorating dollar and leverage for an increased demand for clean energy commodities. All of these have been hedges but we must monitor for a market downturn, which may take down paper assets.

The US equity market is at a critical juncture after reaching overbought territory not seen since before the credit crisis. However, we are at an extremely critical juncture on the S&P 500, where we can be on the verge of an equity correction. If one needs to minimize risk, now is an important juncture to monitor as we may be seeing some of the same forces that caused our summer correction to resurface.

Gold, Investing
It is crucial to monitor this market and minimize risk, as the S&P has reached my measured move after the end of August 2010 reversal. One can predict a move or where the next critical juncture will occur by using this technique, and I often use it to force myself to take profits as it reaches a target. I wrote several weeks ago, when equities were reaching record overbought territory, to be cautious and not to be blinded by market euphoria.

In July of 2009, the S&P bounced through the 50-day moving average going from approximately 85–120. That is a 35-point move, and then in the summer of 2010 we saw a correction down to point C at 100. The measured move is calculated simply, as follows:

A to B = 35 so C to D = 35

100 + 35 = 135

The measured move is another valuable tool to predict critical areas. It works in up and down markets. The measured move does well in timing potential profits and it is quite amazing to see such a simple symmetrical phenomenon occur so often in a chaotic market.

I believe we could see a movement out of paper into precious metal assets as Treasuries and the dollar move into new lows. Pullbacks in precious metals should provide additional buying opportunities.

Make sure to try my free trial of my daily intelligence report that follows rapidly developing situations in precious metals, uranium and rare earths by clicking here.

Jeb Handwerger
Gold Stock Trades

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