The commodity equities are selling off as the Federal Reserve halts quantitative easing.
However, we are reaching oversold levels and support areas where short covering could soon begin. Commodities, metals and the junior miners are hitting multi-year lows and falling below 2008 credit crisis levels. This crash is not based on fundamentals only on an artificially inflated dollar due to yen and euro weakness.
This is not a time to panic, but to continue to accumulate as the bear market may be reaching the final capitulation stage. This decline may be a sign that the quantitative easing may have lifted stock market indices, but it did little to improve demand and growth in the economy reflected by demand for energy and metals.
For weeks, I have been expecting a major long term bottom in the precious metals after major capitulation. The liquidation may have occurred this week as investors sold out of panic and fear rather than take a look at the long term fundamentals. Across the board, many of the weak hands had to sell quality assets for pennies on the dollar.
Smart resource investors expecting capitulation have had some of their bids filled at ridiculously low prices. Fortunes are made by the brave who pick up real assets when the majority is not interested in them. I expect a major bounce at 2008 credit crisis lows and the 2003 breakout on the HUI Gold Bugs Index at $150.
I just returned from the New Orleans Conference which was headlined by Alan Greenspan the former Federal Reserve Chairman from 1987 to 2006. It is interesting to note that Greenspan has become bullish on gold. He believes that quantitative easing did not accomplish what it was designed to do. It helped lift the stock market and stabilize the real estate market, however it fell short as the U.S. economy is not really recovering like it should have. Gold is the best hedge against this uncertainty.
I happen to agree with him. Real estate values have jumped from overseas demand and stock market indices are hitting new highs. Only a small fraction of the U.S. have gotten wealthier as the real economy continues to struggle. First time home buying is at a record low.
Greenspan is continuing to warn about the Fed’s exit from quantitative easing, which I am quite concerned about as well. Look at the recent volatility in the U.S. dollar and treasuries. How long can this dollar rally last before creating the next financial crisis? When the US dollar is moving parabolically higher like a dot com stock I exercise caution as this could have drastic effects on foreign exchange markets and international trade.
The U.S. economy is already slowing drastically due to this rise in the dollar. The mining and oil/gas sector have slowed down drastically and real estate sales are waning. The next round of economic numbers including unemployment may be awful and QE may have to be restarted.