The money is starting to pour in.
Hedge funds and institutions that once sat on the sidelines are beginning to show their strength. That’s why this past Friday, the markets roared.
Not only did new economic data show that demand for American equipment is improving, two powerful hedge fund managers came out with overly optimistic comments on equities.
One of the hedge fund managers, Doug Kass, said that betting against bonds would be the “trade of the decade.” Moving out of bonds will undoubtedly take money out of that asset class and shift into equities. David Tepper, the other hedge fund manager, said that equities are all but guaranteed to go higher because of the U.S. Federal Reserve’s pledge this week to intervene with more stimulus if needed (see The Double Take.)
Of course it’s not just their comments that added to Friday’s rally.
Recent events are making equities look very strong. The Dow once again made substantial gains this week, making it the fourth straight week in the green. To add to the rally, U.S. lawmakers will postpone a vote on whether to extend the U.S. tax cuts – a development shows a strong possibility that most of them will be extended. We also have the possibility that the Republicans – often regarded as business friendly – are going to take control of the U.S. House of Representatives after the November elections.
But more importantly for us, gold and silver once again hit new highs.
Silver reached as high as $US21.48. A few dollars may not seem like much, but this is the highest level for a most-active contract for silver in over 30 years! Gold also finally surpassed the $1300 mark, reaching a record $US1301.60, before settling back down.
Every time gold or silver goes up, contrarians scream bubble – yet, both gold and silver have continued to push new highs.
As mentioned last week (see the Breakout), with the rise in both gold and silver prices, we are now looking at the beginning of a renewed junior market sector.
Funds are slowly beginning to flow back into the junior mining segments, which means that we may see a strong breakout over the next year for junior miners and explorers (see the Breakout). Combine that with the continued increase in gold and precious metal prices, the juniors are set to continue their run (see It’s Almost Over.)
Nobody is expecting the US Dollar to do much in the next little while. So you can bet that gold and silver will find a way to work itself higher. With more stimulus and spending in the works, the Fed is cranking up the printing press again, and the dollar is going to suffer for it.
But that’s exactly what the US wants…
The Printing Press Strategy
Everyone thinks the US dollar is tumbling and the US is losing its power and control of the world. But what’s really happening may shock you.
In US’ current economic state, it wants to devalue its currency. It needs to. It’s their secret way of rebuilding a bigger, stronger economy.
And it will work.
The US, and its citizens, are known to be a big spenders. But that was before the world collapsed. The US no longer wants its citizens to spend money – not outside of the US anyway. It wants everyone to spend money in the US. And what better way to do that than by reducing its own purchasing power against foreign markets. What better way to do that than to print more money.
Think about it. Not only is the US encouraging exports by devaluing its currency (thus bringing more money from the foreign markets and into the US economy), it’s also using the money from the printing press to make the US better through growth and innovation. Two birds, one stone.
The Battle for the Number One Spot
The trade war between China and the US is evidence of US’ “printing press” strategy.
As the two biggest economic powers in the world, China and the US are constantly battling over currency value. On the one hand, China’s financial position is strong and they have growth. On the other hand, they have no innovation. They rely on manufacturing and exports from cheap labour. (see Time to Think Again)
That is why there is so much controversy surrounding China’s currency value. China doesn’t need to print more money – it has more than enough. That’s why they have no excuse to devalue their currency. The US, on the other hand, is printing money so it can devalue its currency to encourage exports, while fuelling growth and innovation.
By limiting China’s exports, it slows down China’s growth and encourages the growth of the US. This strategy is already starting to take place. A bill that would give the U.S. government the power to impose economic sanctions on China and other countries found to be manipulating their currencies to gain trade advantages has just won approval from a key House committee.
American manufacturers say that China’s currency is undervalued by as much as 40 percent against the Dollar. That makes Chinese products cheaper and more competitive in the United States and American products more expensive in China. For example, China ranked No. 3 among Florida’s top merchandise trading partners in 2009, with $5.8 billion in trade, which includes $5.2 billion in imports, according to the Orlando EDC. In other words, Florida buys more from China than it sells there. That means money out of the US, and into China. That’s not good for the US.
Beating the Competition
When you want growth, you need to be competitive. What better way to do that than to devalue your own currency and increase the value of your strongest competitor?
As the US dollar slumps, China’s Yuan prospers. In the short term, this may seem like China is winning the battle. But at the end of the day, a lower US dollar makes US exports much more attractive to foreign investments, fuelling money into the US economy.
China, on the other hand, whose main power relies on manufacturing and exports, will eventually suffer as their currency increases in value.
So for those of you who believe the US is digging its own grave by spending so much money, you may have to rethink that philosophy.
But this is all great news for investors. The Dollar will fall but stocks will rise through growth and innovation. The Dollar will fall but precious metals will rise through safe haven investing. All in all, if the markets hold, this may be one of the best times to invest for the long term.
It may be a bumpy ride, but the destination will be rewarding.
Until next time,
Ivan Lo
Managing Director, Equedia Weekly
Equedia Network Corporation
www.equedia.com
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