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Investing Ideas Profiting From Asymmetry
Investing Ideas Profiting From Asymmetry 
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Fellow Investor, One hundred years ago, steel was the IT industry of its day -- a cutting-edge sector that was a symbol of a country's economic might. Andrew Carnegie, U.S. Steel, and Pittsburgh were what Bill Gates, Microsoft and Silicon Valley are today. |
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| Profiting From Asymmetry |
| Wednesday, 10 October 2007 | ||||||||
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"If you wish to be a success in the world, promise everything; deliver nothing." -- Napoleon Bonaparte The US stock market is performing well, and the commodity markets are acting even better. From the commodity markets, I've covered precious metals in detail recently because of the potential for outsized gains in the sector's seasonally strong fourth quarter. This textbook bullish behavior of both stocks and commodities is deeply rooted in the way central banks handled the famed credit crunch this summer. But this monetary response has its side effects that investors can use. What the Austrian School of Economics has against modern area central banking is simple: It always targets asset prices on the upside. Central banks are ready to support the markets if they go down, but they're very reluctant to stop them if they go parabolic. Alan Greenspan started this during his long tenure at the Federal Reserve, and Ben Bernanke appears to be keeping up with the trend. The cushion that the Fed always provided when the economy stumbled or the markets turned lower used to be called the "Greenspan put." Now it's called the "Bernanke put."Anyone who has dealt in options should know that the insurance they provide doesn't come free. Even though Bernanke is providing put options insurance--as he did this past summer--the long-term inflationary cost may be substantial in this case. You can see that in the surging price of gold and the action in precious metals mining stocks. The sector ran up a lot in September. Look at the more conservative PHLX Gold and Silver Index (the XAU). It was up 9.8 percent from Sept. 13 to Sept. 21. Although it's normal to expect a correction here, it's not coming. All the dips are being aggressively bought, which indicates investor eagerness to participate in the rally.Those who missed the precious metals stocks at much lower levels this summer may be hoping for a better entry point. The sector surely is acting like it wants to go higher. From the lows in August, the XAU was up from 120.43 to 173.17 at the recent high. This is more than 50 points--a huge move that needs to be digested--but this is happening in the most bullish of ways. Instead of selling off, gold stocks are moving sideways in a narrow trading range, which is how the market usually pauses to take its breath. From a trading standpoint, the parabolic move we saw in May 2007 was doomed to fail as it accelerated faster and faster at the end of a big bull run. Those were the classic signs that the 2006 rally was simply about to run out of gas.
This is very different. The XAU has consolidated the gains from 2005-06 under the formidable resistance level of 155 that's killed every rally in the last 25 years. Now we've taken out that resistance level in one swift move on the heels of a huge move in gold bullion that also made fresh 27-year highs. Tactically speaking, “resistance” should become “support” in trading terminology, so I don’t expect to see the XAU decline below the 150-155 range, especially on a monthly closing basis. It's also key to repeat that, if this is a real breakout, silver should outperform gold to the upside. Silver still is well below the highs seen in May 2006 and hasn't yet followed gold bullion.I believe this is an opportunity to play catch up for both silver--through the iShares Silver Trust--and silver stocks. Source : Global ViewPoints This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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