Bullion Charts and Commentary
posted Jan 20, 2006 at 11:59PM
The Canadian Election
On the eve of the Canadian Federal Election, the media are trumpeting a victory for the neo-conservatives. How will this affect investment decisions? Bob Hoye, whom I have a lot of respect for writes the following:
"Canada's federal election on Monday January 23 could establish a majority Conservative government. This would briefly rally the dollar.
After that, weakening base metal prices and a resumption of widening corporate spreads would weaken the C$.
On the longer term, a Conservative majority would likely be associated with a recovery in the Canadian unit to par with the U.S."
It is the latter comment that I disagree with. Under "conservative" financial management, and during an commodities inflation cycle, then yes, one could expect that eventually the Canadian dollar would reach par with the USD, just like in the 70's. However here we have neoconservative managment and that means only one thing: DEBT!.
We do not even need the five year demonstration that has been provided by the US: we only have to look back at Canada's own history.
The last time Canada experimented with neo-conservative money management on a national level, was with Brian Mulroney. That experiment saw Canada brought to the brink of bankruptcy, and the treasury being liquidated in a vain attempt to prop up our dollar.
The other example is the huge debt explosion for the province of Ontario under Mike Harris.
I see no reason why things will be different here. Unlike the US, there is no motivation for the international FOREX community to prop up our dollar as our consumer market is just not that big. Indeed they have every reason to drive it down to make Canada's resources and their companies cheaper to acquire. Canada who currently has the best set of government books amongst the G8, would go back to having one of the worst. That Canada's surpluses would be wiped out witin one year of a neo-coservative majority is one of the safest bets you can make.
So what does that mean for Canadian investors. Personally I think it only heightens the need to be invested in "things", especially gold and oil. You also want to use any initial period of Canadain dollar strength (lower interest rates) to think about turning variable rate debt into fixed rate debt...or getting rid of it entirely. At some point Canadian interest rates are going to climb and climb hard and those with cash at that point will be able to take advantage.
If you are a "working stiff" with little capital, then hard times are coming and you might as well start preparing to stand in long lines of one kind or another.
So with that, let us look at what kind of condition the gold sector is in.
The bearish candle and bearish divergenced point out a strong possiblity of at least some kind of retrenchment.
It is moonshot or die time. Not the most enticing situation for contrarian traders, or for those who want to enter longer term investment positions.
Bullion COT Data
Bullion Seasonal Chart
Seasonal forces are at a peak for bullion. They will now be working against the gold sector.
Currency COT Data
USD COT Data
Swiss Franc COT Data
COT data shows that the commercials have covered a good chunk of their dollar short positions and thier Swiss Franc long positions. So obviouly they are not expecting the USD to do any sky-diving as of yet.
At this time, my "official" position is to be neutral, or short-term bearish. Basically I am standing aside until some of kind of dip occurs. There is certainly a technical case to expect one to happen soon. That argument would stress the overbought technical condition, bearish technical divergences, seasonality and currency COT data.
As well all equities have benifited from a sea of liquidity, and the recent soft path in world indexes may be a sign that the easy money train will be taking a breather.
But understand that a lot of that "position" is not from choice but through force of circumastance. Right now my portfolio is very overweight energies and cash. I don't really don't have the capital to make meaningful bets in the gtold market at this time. To do so would mean selling my energies, which I don't want to do, or break into the cash portions. Because of the energies performance, the percentage of cash is already lower than I would like.
Again everyone's own circumstance is different and thus everyone's decision making should be different. The question that many who are sitting on profitable positions is whether one should cash in and try to buy at a lower entry or just sweat out the retracement.
All I can say there is that the price action of the gold sector has been nothing short of outstanding. All of the evidence points to the start of a major new impulsive leg of high degree. As such, any dips would be short, relatively shallow, and more difficult to "time" than past corrections.
The HUI has very strong support at 250, and until that level was breached, talk of deeper corrections is pre-mature.
For those who want to "play", I still think the exploeres are the place to do it. I am sure you have noticed that the plethora of "bottoming" patterns that were evident even a few short weeks ago, have mostly disappeared. Market depth and bullish break-out price action is the way to go there.
In the big big picture, over the next three years I believe you want to keep exposure to both gold and oil, and preferably both. Personally I also like facing the future with a relatively high cash component.