| • Three Flashing Red Lights • New, Torrid Growth Stats from China • Avian Flu Pandemic: Potential Impact on Commodities • Steps You Should Be Taking Now…
After a temporary lull, the dollar began surging again in late October and has staged a clean break-out to the upside in the charts. Initially, gold fell, part of a normal correction after a big summer gold rush. But now, gold is following the dollar up, jumping by $10 over the last few days and almost another $10 yesterday. This dual rise in the dollar and gold is a sign. It implies that unusual events are taking place overseas and that those events may be prompting international investors to run for cover. Their two favorite safe havens: Gold and the U.S. dollar. So this morning, I have been scanning the horizon broadly to get a better sense of what’s going on around the globe. Sure enough, a series of flashing red lights came up on my radar screen … Red Light #1: Europe Last June, France, Holland and Italy overwhelmingly rejected the proposed new European constitution, a major blow to European unity. And now … In France, we’ve seen riots spreading throughout the country. We see violence still smoldering in some areas, despite curfews now in force in 40 cities. We see the government extending its national emergency powers for another three months. And we see chronic mistrust of government. GDP growth, meanwhile, is an anemic 1.5%, even before the latest disturbances. In Germany, Chancellor Schroeder has just said a bittersweet farewell to his party … while Angela Merkel, soon to become the first female chancellor, is unlikely to last very long on the job. Reason: She’s presiding over a disastrous economic program that she has no power to change … and that’s shoving Germany toward recession. Already Germany’s economy is expected to grow by less than 0.8% this year, while the International Monetary Fund has downgraded its 2006 forecast from 1.9% percent to 1.2%. In Italy, Prime Minister Silvio Berlusconi is likely to be defeated in next April’s elections as the economy slumps. A coalition headed by opposition leader Romano Prodi leads Berlusconi’s government by 12 percentage points in the latest opinion poll. Economic growth: Practically zero. Overall, the country is on track for its poorest economic performance since 1993. Even Great Britain, which had previously escaped the Eurozone’s woes, is now being dragged into a similar quagmire. An outright defeat for Prime Minister Tony Blair in a parliamentary vote on terrorism last week is just the first salvo in a growing revolt against his government. It could also be the prelude to his early departure next year. A key underlying reason: The British economy has now registered five consecutive quarters of sub-par growth. With these economic and political disasters sprouting across the continent and the UK, it’s no wonder European and other investors — especially those most directly threatened by the crises — are groping for anything that’s relatively more stable, such as the U.S. dollar and gold. Red light #2: Iraq, Jordan, Iran
Insurgency and Terror Spreading Outward. Defiance of the West Growing More Resolute. Some of us may have become inured to the bad news streaming steadily out of the Mid-East and the Persian Gulf. But that apathy does nothing to halt the downward spiral in the region. In the past two weeks we’ve seen …
As in Europe, many investors in the Middle East and Persian Gulf nations have accumulated massive wealth. And like the Europeans, they’re frightened. They may not like the U.S. dollar for what it stands for politically, but that doesn’t stop them from rushing to the dollar when they’re scared financially. And their lust for gold in times like these is even stronger. Red Light #3: North Korea’s Nuclear Weapons It’s now been over two years since North Korea began talks with the West to end their nuclear weapons program. But despite all that time and all that banter, The true thoughts behind such words: A nuclear North Korea is more frightening — and more real — than a WMD-armed Saddam Hussein. In September, North Korean officials said they were ready to end nuclear activities in exchange for aid and security guarantees. But soon thereafter, they backtracked, insisting they must have a light-water reactor for civilian use, a deal-breaker. Meanwhile, North Korea claims it already has several nuclear weapons and the CIA estimates it has produced the fuel for six or more. For you and me, these far-away stirrings on the Korean peninsula may not seem very relevant to our investment decision-making. But for citizens of China — and especially those of Japan — even the slightest hint of a nuclear-powered North Korea sends shivers of fear up their spines. Their response: Buy gold! Meanwhile … China’s Economy Continues While accelerating or impending crises in Europe, the Middle East, the Persian Gulf, and Korea prompt fear-based demand for gold … the near non-stop growth in China is driving industrial-based demand for virtually every commodity under the sun, including gold. China has already replaced the United States as the largest consumer of copper, zinc, tin, rubber, wool, cotton, coal and major oil seeds. It’s the second largest consumer of oil, aluminum, nickel and lead. And if it continues growing at its current pace, it will soon surpass the U.S. in those commodities as well. China’s industrial output jumped by an annual rate of 16.1% in October. In the first 10 months of the year, actual foreign investment declined slightly. But contracted foreign direct investment, the best indicator of future investment flows, surged by a whopping 22.5% over the same period last year. Also, look at these results: China’s retail sales in October — up nearly 13% over last October … clothing sales — up 17% … home appliances — up 24% … telecommunications and vehicle sales both surging at a breathtaking pitch of 27%.
And at $1.6 trillion in GDP, China is now the 7th largest economy in the world. Adjusted for differences in purchasing power, the Chinese economy is the 2nd largest in the world, the equivalent of 60% of the size of the U.S. economy. As surprising as this might seem, I think it’s just the beginning of China’s ascent in the global economy. Why? Because right now China’s per capita GDP is a mere 14% of the U.S. But China has nearly 1.3 billion people — over 4 times the population of the U.S. As incomes rise in China, it’s not hard to see how the Chinese economy could surpass the size of America’s. That would indeed be amazing. And this exponential economic growth is what’s driving up the price of virtually every natural resource under the sun. This Brings Today’s
Story Back to Gold There is no other asset in the world that can give off as many clues about the future as gold. It can tip you off to deflation … to inflation … to stagflation (what I call “The Big Squeeze”) … to political instability … to a looming derivatives crisis … to economic crises … to the decline in investor confidence or to the rise of investor fear. Gold has the longest, richest history of any traded asset since the beginning of civilization. The data goes back over 5,000 years. And as I showed you at the outset, gold is now rallying along with the dollar. This does not happen that often, but when it does, it signals to me that …
Plus, there’s one more clue I think gold may be giving us. And it’s a nasty one … Avian Flu Pandemic: No one knows what the future will bring. But I’m in agreement with the experts on this one point: A pandemic is inevitable. The only uncertainty is when. The economic consequences of a pandemic are also hard to pin down. They will depend on how soon the virus becomes contagious among humans … and how much we can do to prepare between now and then. In principle, however, I believe we can safely assume that pandemics are bullish for the price of natural resources. Right now, infected migratory birds are bound to reach the United States almost any day. That’s an immediate threat to U.S. poultry and possibly U.S. livestock. So expect the prices of boilers, beef, and pork bellies to rise sharply. And don’t be surprised if they go up simply out of fear and anticipation of a future crisis. A human pandemic is not yet a present reality. But when it strikes, you can expect global trade to suffer paralysis — perhaps just temporarily, perhaps for an extended period of time. You must also seriously consider the possibility that mines and oil fields, faced with acute labor shortages due to illness and quarantines, could be forced to slash production. Worse, factory assembly lines, unable to get “just-in-time” shipments of critical parts or materials, may have to shut down. In a word: Expect supply disruptions, spot shortages and surging commodity prices … with big dips in between. This seems to be what happened around the time of the last major pandemic in the late 1910s. Although it’s hard to trace precisely what caused what, the price of wheat soared as much as 40%. Rice, corn, oats, soybeans, coffee — all soared. Even the price of oil jumped — from just over $4 a barrel to nearly $6 in one year. There was plenty of oil in the ground back then. But with most workers sick or in quarantine, it appears oil companies had trouble pulling it out. Above-ground oil and gas supplies were hoarded. Prices surged. And shortages related to World War I also aggravated the situation. For my full report on the pandemic, please be sure to see this month’s Real Wealth Report, available to paid subscribers on the Web tomorrow, and available gratis to subscribers to our trading services. (More on these in a moment). Steps You Should Gold’s near-$20 surge in the last few days is telling us it’s in a bull market, and that the bull market continues to gain in strength. My recommendations: First, stay very alert. Do not let the recent quiet in the stock markets or the correction in oil cause you to drop your guard. Second, continue to keep most of your liquid cash in short-term money market funds. Stay away from long-term notes and bonds, regardless of the issuer. Third, use any market strength to sell vulnerable stocks. The primary exceptions: Hold your gold mining shares, gold mutual funds, your energy shares, and other recommended natural resource plays. Fourth, be aware that markets are interrelated. When one breaks out (as the dollar did last month) … another may soon follow (just as gold has done now). Copper is already surging as Martin showed you yesterday. Natural gas is also moving up gain. Crude oil could be next. One by one, these markets are ending their short corrections and should soon be jumping higher. So if you haven’t yet jumped on these opportunities, now’s your moment. Hold the core positions we’ve been recommending here in natural resources. Then, for money you can afford to invest more aggressively, take a look at my specialized Gold Trader Hotline. It helped make subscribers money even when gold was going down … it should help them make much more with gold going through the roof. Plus, to participate in the next surge in natural resources, consider the Canadian companies at the forefront of the boom. My good friend Sean Brodrick has identified some fascinating natural resource companies that are massively undervalued, trading for as little as 10 cents on the dollar. His free report provides the details. Best wishes for your health and wealth, Larry Edelson, Editor About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. © 2005 by Weiss Research, Inc. All rights reserved. |
Gold through the roof!
Larry here, with an urgent alert on two key markets: Gold and the U.S. dollar
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