John Lee’s calls on gold and various markets for 2009
In 2008 we saw some of the most dramatic financial events in a century:
* $trillions of subprime mortgage implosion, which bankrupted the entire US banking system.
* Lehman’s fallout with entangling positions in equities, futures, real estate, and derivatives in the $hundreds of billions. The magnitude dwarfed LTCM.
* Biggest squeeze on the dollar. Despite worsening fundamentals, dollar rallied 20% in the second half of 2008 as banks refused to loan and assets are sold to pay dollar debts.
* Largest de-leveraging process. Margin calls caused severe corrections (-50% or more) in broad equities and commodities.
* Unprecedented intervention with multi-$trillion financial bailouts and record-low interest rates of near 0%.
What’s in store for 2009?
We will make our calls with the aid of following charts.
Gold:
Case for:
Gold is liquid, compact, universally accepted, and can not be created or diluted at will. As investors face zero% yield, uncertain economic times, and daunting deficits, it’s no surprise that gold came through 2008 unscathed.
Case Against:
Gold has faired very well while all other asset classes endured severe correction in 2008. Gold right now is near its historic high compared to oil and copper. It is an emotional investment, which makes the top and bottom difficult to call.
Verdict:
I look for side-way action for gold between $700 and $1,000/oz as markets battle through fears of depression to come to grips with inflation.
Gold Stocks:
Gold stocks provide leverage to the gold price with high fixed cost and low marginal cost. Gold stocks couldn’t shake off the equity bloodbath and disappointed investors by losing 30%+ in 2008. The action for 2009 will remain volatile as margin calls will continue to cause weak hands to sell into strong hands. There are also many poorly managed gold companies that won’t survive through permitting issues, high operating cost, and geopolitical risk. Gold equity valuation is about earnings and ounces in the ground. I am not wildly bullish on gold stocks yet as speculative spirits could take months to return. However a modest rebound to 150 from current 105 is very reasonable and represents healthy percentage gains.
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