 Gold Smashes Dollar in 2006
Todd Stein & Steven McIntyre
The Texas Hedge Report
January 4, 2006
Courtesy of www.texashedge.com
The boys on CNBC were back
at it again on Tuesday. The cheerleading anchors couldn't wait
to start the year off on a high note for the equity markets.
After all, there is speculation that we are nearing the end of
the Fed rate hike cycle which equates to nothing but blue skies
ahead for equity markets. In addition, real estate has cooled
off which means that mom and pop may choose to reallocate their
savings to stocks rather than investment properties. Finally,
stocks haven't moved anywhere in two years, so it is only logical
that they should be ready to take off again. Ahh, optimism is
in the air!
Let's break down these assumptions
one by one:
Rates - Allowing mild inflation
(loose monetary policy) is always more politically acceptable
than credit-crunching deflation (tight monetary policy). So in
the short run, it is very possible that the Fed will stop hiking
or even start cutting should the economy slow. This is the consensus
view on Wall Street and we think it is a reasonable one. In the
long run, however, we see rates reverting back to their mean,
which on the 10-yr is approximately 7% since 1960 - this not
good for overpriced stocks and bonds.
Real Estate - The notion that
real estate has moderated is balderdash. If an overvalued sector
becomes more overvalued but at a slower rate, it still is a bubble.
Mom and pop will not pull out of real estate until we start to
see meaningful depreciation in property prices nationwide. Yes,
Miami, Las Vegas, California and New York are all out of control,
but a true real estate slowdown will affect prices in every region.
Stocks - The market, which
trades at a trailing P/E of 18x (20-40x for many techs and small
caps), is not cheap on a historical basis. If the economy is
at the end of the expansion cycle (as the yield curve predicts)
then earnings will not see meaningful increases anytime soon.
One topic that seems to have
been forgotten is the decline of the U.S. Dollar. While the greenback
staged a moderate (10%+) recovery in 2005, it is still nowhere
close to its highs versus the Euro & Yen. The Dollar did
well in 2005 for a number of reasons, but two critical factors
were the relative short-term interest rate differential and the
American Jobs Creation Act, which encouraged multinational corporations
to repatriate overseas cash into Dollars before year end. With
rate hikes ending and the AJCA expiring, the U.S. Dollar should
begin to resume its downfall. The greenback's fundamentals have
gotten a lot worse over the last twelve months as both the U.S.
trade and current account deficit have soared to record levels.
We think 2006 will be the year
that the average investor wakes up to the U.S. Dollar's vulnerability
and begins to use gold & silver as a way to protect his savings.
The Euro & Yen have proven their fallibilities as hedges.
Gold is now available to be purchased through two ETFs (tickers:
GLD & IAU) with silver about to join.
January 4, 2006
Todd Stein & Steven McIntyre
Archives
Texas Hedge Report
Todd Stein
& Steven McIntyre
email: admin@texashedge.com
For more information, go to http://www.texashedge.com.
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