Tuesday, December 1, 2009

New Highs for Gold, Silver Bucks Higher

Now that fears of another financial meltdown - a la Dubai - have subsided, world markets have bounced back nicely. Taking a look at the charts from the past three days of trading, we see the Dow, S&P and NASDAQ have all just about recovered from the swift down-kick from Friday. The Dow, in fact, made a new 52-week high today.

Most of the experts who have been covering the situation considered the Dubai dilemma to be nothing more than a hangover from last year's malaise. Certainly, the sultans and magnates in charge of one of the world's most robust commercial real estate build-outs had to know there were risks - overbuilding, high prices - but were blinded, like most of us, by the glorious profits which emanated from the global peace-time asset expansion.

While some of the projects in Dubai have been halted or scaled back, there are issues remaining to be worked out, such as rental prices, debt restructuring and all manner of price upheaval, but most of the companies and people who made investments there are well-heeled and not likely to bat much more than an upturned eyelash at the situation.

So, it's back to the risk trade, with the dollar down against the Euro mainly, and most other currencies, driving more and more money into stocks. As long as the dollar remains weakened - due to our high deficits, low interest rates and an implacable central bank (the Fed) intent on keeping things that way, stocks should have little impediment to move forward through the end of the year. What happens after that, in 2010 and beyond is another matter, though nobody seems particularly concerned about untidy matters such as inflation and the new bubble in government bonds, so long as there's money to be made in stocks, everybody's favorite game.

And while stocks have done exceedingly well, gold has outperformed everything in sight and continues to do so, today making its 25th all-time high in price. What people do not understand about the move in gold, as it usually responds to inflation - not deflation - as we are currently experiencing, is that it is a bet against all paper currencies. As long as they are floated and priced against each other, gold provides its investors with a surging supply of wealth in a hard asset. Unlike the fiat currencies, gold is tangible and its supply cannot be expanded easily. It costs more than $400 to extract one ounce of gold, so the miners, currently digging as furiously as they can, cannot produce enough supply to meet the growing demand.

The same is true, to a degree, for silver, though it is more abundant than its yellow cousin and used in more industrial situations. It has not eclipsed the highs of 2008, though today's move above $19/ounce puts it on track to shatter the $20 mark by year's end - maybe even the end of this week. Investors in the precious metals are enjoying the best price appreciation of all time.

With stocks up well from the March lows (nearly a 60% gain), all asset classes seem to be in good condition, though there's still some searching for value. Having some gold and/or silver mixed in with your paper assets has been a much better idea than just a hedge. The hard assets have actually returned quite handsomely.

Dow 10,471.58, +126.74 (1.23%)
NASDAQ 2,175.81, +31.21 (1.46%)
S&P 500 1,108.86, +13.23 (1.21%)
NYSE Composite 7,212.08, +119.72 (1.69%

On the day, the simple indicators were right in line with the headline numbers. Advancers trampled all over declining issues, 4916-1650. There were 406 new highs, to just 79 new lows. Volume was the best it's been in the past two weeks; all indications are for another leg up in the markets. Besides the A-D and high-low lines, volume and the unusual pattern of the markets - in which rallies have burst forth at the beginning of each of the last four months - are screaming to investors to buy now, despite recent highs. The pattern has been for stocks to pull back 3-5% after each of the subsequent runs, but this time the Dubai incident managed to sting only about 2%. Stocks are poised for another move higher, with the Dow heading to 10,750-10,850 or higher, by year's end.

Valuations may get a little on the pricey side, but that is a normal feature of raging bull markets, of which this undoubtedly is.

NYSE Volume 5,002,317,500
NASDAQ Volume 2,199,957,750

Commodities took the dollar down trade in stride. Oil popped another $1.75, to $78.75. Gold surged $17.90, to $1,200.20 and silver vaulted 68 cents, to $19.20. As well as gold has been going, silver should outdo it over the next few months if today's outsize gain is any indication.

Investors aren't waiting for retail figures or any other metrics at this point. They are snatching up investments in a chase of performance, led by the nay-sayers who haven't had enough faith in this market. The current condition is the perfect set-up for a true blow-off topping rally, especially once the S&P clears 1115. Stocks could gain another 5% before we close out 2009.

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