The Market's Having Second Thoughts

Dow Theory Letters (06/01/2009)
"Speaking of stocks, with the Averages backing off from their thrust at the May highs, it's clear that the market is having second thoughts about the picture. My guess is that those thoughts have to do with the sliding dollar, sinking bonds with their higher yields and the surging price of gold.

When the dollar declines, it means that the dollar buys less in the way of imports. This presents foreign exporters with a problem. Why not lower your own currency so your goods appear more attractive to U.S. buyers? But how do you lower the relative value of your own currency? Easy, your central bank creates more of your money, and with the fiat cash you buy dollars, thereby raising the price of a dollar relative to your own money.

Of course, there is a risk. If a lot of central banks create a lot of fiat currency, you're talking about multi-devaluations on an international scale. Gold is the standard, the ultimate money that cannot be printed or created out of thin air. So when seasoned investors become suspicious of ALL fiat currencies, they move to the safety of gold.

Gold is every central bank's enemy. If people prefer gold to the banks' paper, then what is it saying about the banks' beloved money by fiat? It's saying that fiat money is neither safe nor is it a store of value. The reaction of the central banks to rising gold—keep it down, knock it down, flood it with shorts, talk it down, manipulate it down, scare it down by announcing coming large sales of gold. But you can't fool all the world's investors all the time. Which is why gold is rising as I write.

Primary trend—you don't trade in and out of a bull market. You accumulate. I added GDX to my gold position today. GDX is the gold mining ETF and its major holdings are ABX, GG, NEM, KGC. Ordinarily I would only add gold items on a correction, but gold seems on a roll now, so I added GDX. A few months ago if gold was up 10 on the opening, gold would spend the rest of the session selling off. Not so now, gold tends to close in the top third of its high price for the day."

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