Print-friendly version
Send this to a friend
Posted 1/16/2006
Contrarian Chronicles
About Contrarian Chronicles
Learn the Contrarian Chronicles lingo
Subscribe to Market Rap on Fleckenstein Capital
Contrarian Chronicles
Recent articles:
• Worried about the market? Be ready to act fast, 1/9/2006
• Despite what you hear, inflation is growing, 12/19/2005
• Ben Bernanke scares me -- already, 12/12/2005
More...
| | Contrarian Chronicles
Gold's going much higher; thank China
Recent highs are just a start. China appears to be getting nervous about the billions and billions of U.S. dollars it holds. If it sells those dollars, one clear winner will be gold investors.
By Bill Fleckenstein
Though I have been arguing for the last few years that gold was headed higher, I haven't had much to say lately (with this exception, regarding Newmont Mining (NEM, news, msgs)) as it has been making 25-year highs.
Consequently, I feel an update is due. However, my view is unchanged: Gold is headed much higher.
Precious metals: Venomously volatile
A friend of mine who made his fortune on the floor of New York's COMEX (where gold futures are traded) recently said he didn't think that anyone on the planet could successfully trade the metals -- as they were now "unhinged," and extreme volatility is a daily occurrence. For instance, what gold and silver inexplicably "decided" to do on Jan. 5 was to drain about 1.5% and 4%, respectively.
The lesson here: Folks who attempt to aggressively trade these markets will likely either get left behind or get their lungs ripped out -- depending on what they're attempting. However, that doesn't mean investors won't be successful sitting with their positions, as I and others have done.
Fewer dollars in China's 'SAFE'
That our patience might, in fact, be rewarded is no mere baseless hope. According to a recent Bloomberg story, the country's central bank will now start to concern itself with some sort of risk protection on all that paper it owns. Meaning: China might be buying hard assets -- including precious metals and possibly other commodities.
Related news and commentary on MSN Money
In fact, a recent Financial Times story titled "China Signals Reserves Switch Away From Dollar" contained the following quote from the Web site of SAFE, China's State Administration of Foreign Exchange, about one of the agency's goals for 2006:
"Improve the operation and management of foreign-exchange reserves and to actively explore more effective ways to utilize reserve assets. . . . [The objective is] to improve the currency structure and asset structure of our foreign-exchange reserves, and to continue to expand the investment area of reserves. We want to ensure that the use of foreign-exchange reserves supports a national strategy, an open economy and the macro-economic adjustment."
I think folks can rightly conclude that SAFE's statement is metals-friendly. It's probably dollar-negative and perhaps even fixed-income-negative, too, though for the moment, it's only being interpreted as positive for metals.
(A version of the story can be found here.)
So much noise, there's surely truth
Of course, to muddy the waters, midweek the Chinese trotted out a few talking heads, apparently to dampen the speculation about what they may be doing with their current dollar reserves and potential future purchases of oil and/or precious metals.
Nevertheless, there have been so many stories about China's reserves reallocation that I believe where there's smoke, there's fire. It makes perfect sense. I think that the Chinese are much more likely to be proactive, in terms of trying to prevent the dollars they own from turning into the confetti that they are -- as opposed to, say, Japanese institutions, which, as investors, always seem to be the mullet of last resort.
Bottom line: It's probably not debatable that the Chinese are in the process of selling some of their dollar reserves. What we don't know is how aggressive their selling has been and how far along they are in the process.
Finally, I am told that last Monday, Bubblevision made quite a big deal over the fact that the Dow Jones industrials ($INDU) surmounted the meaningless round number of 11,000. However, on the subject of round numbers, there was apparently no attendant fanfare to gold breaching $550 -- its highest price since 1980 -- though I suppose that, by the time Bubblevision gets lathered up about gold, it will probably be time to lighten up a bit.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily "Market Rap" column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money. At the time of publication, Bill Fleckenstein was long Newmont Mining.
|
