Get Ready for an Energy and Precious Metal’s Rally

March 7, 2010 · Posted in Weekly Posts · Comment

Last week’s equity rally was a largely short covering affair as evidenced by the vertical rises during the day on Friday, the one way action, the declining volume, and the strong on-balance volume rise. Markets are near overbought, are generally in tight rising channels or wedges and, having risen multiple days in a row, are in need of a pull back. That said we are seeing evidence that the USD is weakening and precious metal stocks are getting ready to move decidedly higher. Energy too looks like it is moving onto a bullish configuration so this next few days of consolidation should represent a buying opportunity in these areas which will be followed by new highs in US markets.

Macro Background:

The Greek crisis is passing. Yes, there are still problems but the bond auction last week went well with three times the number of subscribers as available bonds. The Europeans will defend the Euro but they may do much of that defense through legal actions rather than by throwing money at the problem. Already we have seen investigations launched into the companies that advised Greece on their CDS’s. The Greek Government banned any hedge funds or hedge fund proxies from bidding on their bond auction. Investigations are being launched into hedge fund and proprietary currency trades that sought to short the Euro. None of these activities are illegal but the message is “attack our currency and we will come after you”. Given the anti-trust rulings that the EU has handed down against Microsoft, Intel, etc., funds should have no doubt about the EU’s willingness to go on the attack.

As a result, we should see renewed strength in the Euro and a decline in the dollar.

While sovereign debt issues remain around the world, the Greek crisis probably shows that nothing is about to come unglued immediately so the risk trade will start coming back on. In addition, during this period gold has held up very well and it and its miners look ready to start moving up. This next bull leg up in gold should make new highs in the $1300 range or about 14% appreciation. Many of these miners then have 25-30% appreciation potential from here if they recover their old highs.

Energy stocks look set to rise after we get a consolidation in equities this week. Specifically the oil services and the drillers.

In the past week or so we have noted a few interesting stories around the world. Chinese manufacturers are apparently having great difficulty in some areas hiring sufficient workers to support the orders that are flooding in. They are offering bonuses and pay increases to attract the necessary people.

BHP negotiated a coking coal contract 55% above the previous level this past week. While it is only in effect for a single calendar quarter it is indicative of the pricing power that basic material companies are gaining.

Steel producers are raising prices as are potash producers and iron ore producers.

During the 1990’s the US imported deflation through cheap Chinese goods as we outsourced our manufacturing to Asia. This allowed the US to enjoy a golden period of solid growth without rising inflation. We said last year and we will say it again, the US will import inflation from Asia in the coming years and we will be importing it into an environment that is awash in cheap money. That is a recipe for runaway inflation.

Charts: USD, Gold, HUI (Junior Gold Miners), SPX, XLB (basic materials SPDR), XLE (energy SPDR), WTIC, Copper, TLT (Bonds)