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Minyan Mailbag: Metals

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

Greg,

I read your article and followed most, but I'm definitely not smart enough to understand all. The interesting point to me is the bearish view on commodities and metals in particular. Do you not share the view that precious metals and commodities may be viewed as tangible (non-fungible) in contrast to financial assets stocks bonds currency?

Thanks,
Minyan Tim

Tim,

Indeed, I do believe in the tangible asset value of gold and commodities.

And I believe the rally from below $300, to above $400, in line with bull moves in energy and industrial metals, has been only the first major bull move wave, from 1999, of a much greater-term, secular bull market, with most of the move yet to come in the commodities sector.

However, having said that, now, here, with the degree of CB hawkishness priced into every strip in the world, I see a pause, a tradable decline, perhaps Fibonacci retracements. Gold, maybe, maybe, maybe, into the $370 range, and THEN, to new highs above $500 when monetary authorities start to cheapen money even more, during the next recession, particularly if a debt-deflation develops (not advice).

A correction might represent the second major wave in a five wave major bull market in gold and certain industrial raw material commodities, with the third wave bull move (theoretically the most forceful of the 'waves' momentum and price change-wise) coming after a liquidation-inducing correction ends. This would then be the fundamental macro-phase when gold begins a more decided 'de-linking' from all paper IOU-based currencies, playing into the scenario around which your question is based.

If I am wrong, it will be because deflationary forces are gathering momentum even more rapidly than I currently perceive, in which case all paper is at risk, and crude and gold are the only things worth 'holding'. BUT, this scenario would be predicated upon a Fed reaction, and monetary reversal, which does not now appear as 'visible' anywhere along the horizon.

Thus, as always with gold, the risk to waiting is an implosion in the financial markets, enough of one to cause the Fed to begin easing, immediately.

My problem here is that I do not think the Fed would react immediately, and that the 'pain' necessary to spur the Fed into dovish monetary action, would likely be felt in gold and commodities, too.

Indeed, these sectors still command a tonne of investment action, with a large amount of paper wealth stored in the stocks related to these underlying commodities.

A liquidation in stocks would likely INCLUDE metals and energy stocks, which, at first, until the Fed laid the groundwork for a policy reversal, would NOT necessarily be bullish for those underlying commodities.

But, if we are wrong, hopefully, we'll have enough time to climb back on board the bull train.

Greg Weldon

No positions in stocks mentioned.
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