Sean here. Right now, there’s a major disconnect in the markets — the U.S. dollar is going down while U.S. stocks are going up.
Look at my weekly chart of the dollar. If this were a stock, we’d be talking about a potential bankruptcy!
Why is the dollar in the dumps? My coworker Mike Larson posted a good explanation to his blog, Interest Rate Roundup:
“The U.S. Fed is afraid to raise rates, despite the fact inflation is well above its stated comfort zone, because the housing market is in the toilet. Meanwhile, both economic growth and inflation is surging overseas. So, foreign central banks are hiking interest rates … As a result, capital is migrating to foreign countries and away from the U.S. dollar.”
That’s pretty darn negative! And it begs the question: How can stocks be hitting new highs when the basic unit of trust in the American economy, the dollar, is careening into the gutter?
Well, if history is our guide, this shouldn’t be happening! In a recent issue of his Black Swan Currency Currents, my good friend and crackerjack currency trader Jack Crooks charted the dollar vs. the S&P 500 index …
As you can see, the dollar and U.S. stocks used to trade in tandem. But no longer!
Here’s what Jack has to say about the situation,
“It’s interesting to see such a dichotomy, or decoupling, among major asset classes in the same country — both of which are supposed to express some degree of confidence in said country.
“For one, [this decoupling] is telling us relative to the value of the dollar, based on the US dollar index, stocks have NEVER been more expensive.”
That’s another pretty bearish view! Personally, I’m more sanguine when it comes to America because I think the world’s largest economy has more resiliency than a lot of people realize.
But here’s the point: If you’re invested solely in U.S. stocks and dollar-denominated investments, this is a crucial juncture, and it’s not easy to say which direction things will head next.
That’s why I’m glad to be following the natural resources markets. Why?
Even If the U.S. Falters, Asia Can
Pick Up the Economic Slack
I could argue that this is already happening. The TREMENDOUS demand we’re seeing out of Asia for commodities of all types — energy, precious metals, uranium and more — combined with an ocean of global liquidity, is probably enough to keep commodity prices and select commodity stocks humming along no matter what happens in the U.S.
Remember, commodity demand from Asia is enormous and growing. China is the world’s #1 user of copper … steel … and zinc. And it’s becoming a bigger and bigger buyer of gold, silver and uranium. India is right up there, too.
What’s more, mining and materials stocks are in a merger-and-acquisition frenzy. Last week I told you about Paladin’s potential takeover of Summit Resources. Well that’s just the tip of the iceberg!
For example, Algoma Steel Inc. became the latest Canadian company to agree to be bought as Essar Global, India’s third-biggest steelmaker, pitched woo. And Ipsco Inc., North America’s second-biggest maker of steel pipe, is also in takeover talks.
These companies — who have a very good handle on their businesses — aren’t paying top dollar for the competition because they think prices are about to go down!
Maybe they read the IMF’s World Economic Outlook, which came out in April 2007. It said the world economy should grow at a robust 4.9% in both 2007 and 2008. And it indicated that this rate should hold even if oil goes up to $75 per barrel!
One last thing to consider: Natural resources like gold and silver are priced in dollars — so as the dollar goes down, they usually go up!
In other words, those with a more global perspective … as well as those who diversify their portfolio into precious metals … could not only survive a bear market in the U.S. …. they could thrive.
And let me tell you …
There Are Plenty of Other Reasons
To Be Bullish on Commodities
A strong global economy, and particularly intense demand from Asia, is playing a role in rising natural resource prices. But there are other forces at work, too.
Let’s look at a few …
In crude oil, Mexico’s big oil field is tapping out! From January 2006 through February 2007, Mexico’s supergiant oil field, Cantarell, lost a staggering one-fifth of its production. And in March, Cantarell’s production fell by ANOTHER 5%.
In fact, the Wall Street Journal reports that Cantarell is fading so fast that Mexico may become an oil importer within eight years. Mexico is our second-biggest supplier of imported petroleum, below Canada and above Saudi Arabia — accounting for more than 11% of our imports. We could feel the squeeze from Cantarell as soon as this summer. More and more analysts are calling for $4-a-gallon gasoline this summer.
For gold, production is falling around the world. It’s falling in South Africa, the U.S., Australia, Peru, Russia and Canada! And that’s despite more spending by miners and rising gold prices.
Plus, investment demand is exploding! Exchange-traded funds have made it easier than ever for U.S. investors to buy gold, and two gold ETFs just made their debut in India.
These are two of the forces I named in my Dow Jones MarketWatch article,
“7 Reasons Why Gold Should Surge,” and there are more than that!
The proof is in gold’s chart. You can see that it pushed above the high it set in February, came back to test it and is now taking off again. I think we’re on the way to $750-an-ounce gold.
Then there’s uranium, where supply just can’t keep up with demand. In fact, some analysts say mine production won’t catch up to demand until 2017 — if then! We’re looking at a 10-year bull market in uranium, minimum.
Heck, maybe that’s why the New York Mercantile Exchange (NYMEX) recently signed an agreement to introduce uranium futures on its electronic platforms next month.
I could go on and on about all the very bullish stuff. I haven’t even touched copper yet … or told you how U.S. steelmakers are laughing off talk of a recession.
Bottom line: For natural resource investors, the current market disconnect is something to be aware of, but not something to worry about.
If the U.S. economy keeps trucking along, and the U.S. dollar recovers, Americans have more money to buy things and commodities go up. And if America falters and Asia stays in the lead, commodities will still go up. Talk about a win-win situation!
Yours for trading profits,
Sean
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