Ho Ho Silver
01/30/2006
Someone wrote to me that in the aftermath of a surprising and very disappointing Q4 2005 GDP of 1.1% that the Fed will have to stop hiking rates and might even have to ease -- and that this will be very bullish for equities.
My response was maybe! My sense is that if the rate hike cycle is over, and the Fed has over-tightened to get the economy to slow, now that it has slowed, how many rate reductions, how much monetary stimulation, will be necessary to stabilize it?
When will the Fed start lowering rates? And will pressing Fed funds back to 3.5%, or even 2.5%, do the trick? Or maybe the FOMC will need to revisit the 1% level again (the Japanese should be able to guide us this time around, don't you think?).
If this is the beginning of a downturn, and IF it has similarities to the past two economic downturns (the latter actually was a battle to avoid deflation), then Fed funds might have to be reduced to ever-lower levels for longer periods of time to elicit the desired jump-start response.
And that will not be bullish for equities -- at least for quite a while. So let's enjoy this rate relief rally while it lasts.
And while we're on the subjectÂ…Based on the relatively robust inflation data that accompanied soft Q4 GDP, one could come to the conclusion that there is a stagflationary threat to all of this news -- that is to say, stubbornly high inflation (oil prices) concurrent with economic weakness. Under such circumstances, perhaps the Fed's hands are NOT so free to lower rates without triggering higher inflation. What will our new Fed Chairman do? Lower rates and accept possible inflationary consequences, or refrain from lowering rates aggressively, which could prolong economic weakness?
Certainly, such a time of uncertainty and dislocation will not be an ideal environment for equities. Gold (and silver) would seem to be an attractive idea, which is why my work keeps telling me that spot gold as well as silver are in the initial stages of a powerful bull market, and that pullbacks will be considered major buying opportunities.
On Wednesday I told my subscribers to pay attention to silver. I highlighted the chart of one of the proxy stocks for silver CDE, and wrote, "We should not be surprised to see some money shift into silver from gold in the days directly ahead."
Looking at the CDE chart, it seemed clear that the 16-month base formation once again was nearing its upside breakout point -- at 4.50 -- which if hurdled would trigger upside acceleration propelling the stock above its prior high at 4.70 (from November 28) on the way to my initial projected target zone at 5.50.
CDE Daily Chart:
Well, the stock indeed broke out on Thursday morning as shown in the accompanying chart, hurdling the November rally peak and emerging from its 16-month rounded base formation.
CDE closed Thursday at 4.89 and touched 5.08 on Friday before closing the week at 4.87.
At this juncture, only a sudden downside reversal that plunges beneath 4.40 will compromise the developing bullish pattern in CDE. Much more likely, as mentioned above, will be 5.50!
|