By Peter D. Schiff
In football, when a running back intends to cut to the left, he often first fakes right. This move is designed to make the defense commit its resources in the wrong direction. It is my experience that markets often follow a similar path.
Just prior to a major move in one direction, markets often make a sharp move in the opposite direction first. With respect to the dollar, gold, oil and other commodities, many on Wall Street– and will soon be watching in amazement as the runner sprints to the end zone.
Over the last few months, as the dollar rose more than 10% against a basket of other currencies – and as gold and oil sank to multi-month lows – many investors concluded that a threshold had been crossed, and that the bearish trend for the dollar and the bullish trends for commodities had finally come to an end. But rather than representing a sea change, these countertrend moves more likely signify that the previously established trends are about to kick it into a whole new – and much higher – gear.
My take is that if you already thought you had seen a bear market in the dollar and a bull market in gold, oil, and other commodities, well, "you ain't seen nothing yet."
Corrections are often vicious, designed to shake loose as many investors as possible prior to a major move. The best bull markets carry as little excess baggage as possible. With few speculators on board to sell into every rally, the true believers who remain can receive the full benefit of a fundamental upswing.
Violent downward moves also force out those that were too highly leveraged, or those who showed up late to the party with little understanding of the true fundamentals. Those who panicked and jumped out too low often scramble to reestablish positions at higher prices, further fueling this next leg of a bull market.
This recent correction saw the most dramatic change in sentiment that I have ever witnessed. But the fake that caused the market to commit was, in fact, not worthy of a high school benchwarmer. With absolutely no significant developments that could explain either a top in the dollar, or a bottom in commodities, investors placed their faith in price movements alone. Once the numbers started to show some retrograde motion, everyone simply assumed that a real change had taken place, and the momentum buying and selling began.
The rapid movement reveals how clueless participants in these trades had become. Even those fund managers who typically seem to understand the market's fundamentals were fooled by the sharp price movements and the rhetoric that they spawned.
Lacking any real change in fundamentals, such abrupt changes in sentiment following extreme price swings are as bullish a sign as I have ever seen. There is absolutely no basis for a significant dollar rally, or further weakness in gold, oil, or other commodities.
The United States is the focal point of the world's financial turmoil. We talked creditors around the globe into loaning us trillions of dollars. Now that it's becoming increasingly apparent that we cannot pay the money back, Wall Street has concocted a scenario where our shell-shocked creditors respond by loaning us even more. More alarming is that many brain-dead investors see this as a likely development.
The fact is that the outlook for the dollar has never been bleaker and the prospects for gold and other commodities have never been brighter. The rationale for a new dollar bull market, or bear markets in commodities, is just as flawed as those used to justify investments in Internet stocks and subprime mortgages. Interestingly enough, it's mostly the same suspects advancing the arguments.
[Editor's Note: Peter D. Schiff, Euro Pacific Capital Inc.'s president and chief global strategist, is a well-known market commentator and a regular contributor to Money Morning. Hemost recently wrote about the gloomy "financial reality" that's facing U.S. consumers and feeding directly into the looming "Super Crash." To get our report on the once-in-a-lifetime profit plays that will emanate from this Super Crash – while at the same time getting a free copy of Schiff's New York Times bestseller "Crash Proof: How to Profit from the Coming Economic Collapse" – please click here.]
News and Related Story Links:
- Money Morning:
Foreign Economies Must "Decouple" from the United States by Suspending Lending to U.S. Consumers.
- Money Morning Exclusive Jim Rogers Interview From Vancouver (Part I):
Exclusive Interview: Jim Rogers Predicts Bigger Financial Shocks Loom, Fueling a Malaise That May Last for Years.
- Money Morning Exclusive Jim Rogers Interview From Vancouver (Part II):
Exclusive Interview: Jim Rogers Continues to View China as the World's Best Long-Term Profit Play.
- YouTube.com: Bachman-Turner Overdrive:
"You Ain't Seen Nothing Yet."
- Money Morning Market Analysis: