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2008 was the Year of the Massacre, will 2009 be much better?
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The Venture market replicated the Dow in 1929 with a 78% decline to its lowest point. What will 2009 bring? If the first couple of days of the year are any indication, than it could be a good year. However, we are probably looking at only a Santa Claus rally at the moment. The venture market has had at least a 20% rally so far and on the TSX the market looks quite healthy with about a 15% gain. This is the most green this market has seen in a long time.
Something to keep in mind is that from the top of the market in 1929 to the very bottom was 2 years and 9 months to mid 1932. To put it in context, we’re not half way through that amount of time yet. The market was clearly in a depression, but in that time from the top to the bottom there were 3 rallies that were 30% rises or better, with one of 48%. Following that, from the absolute bottom there was a rally that lasted about 3 months that took the market nearly 2 fold higher, granted that was after collapsing 85%. After that, the market fell another 3/8ths before bouncing over 100% in that year and sustaining it in mid 1934. There was a consolidation period where the market hovered around the “100” mark and then the market took another 3 years to double again. In 38’ the market got cut in half again. At that point the market was still at 28% of its all time high set in 1929.
The point I am trying to make is that about 9 years after the collapse, the market had only been at 28% of its old highs. In fact, the markets would not revisit the old 1929 highs until 1955. Granted, there were some exogenous factors like a major world war that didn’t really help.
So yes this is a beautiful Santa Claus rally, but it is still too early to determine whether or not it is a technical bounce or the start of a new bull run.
The good news is that this market could rally right until the spring where it will either retest old lows and break them or retest the old lows and sustain them.
One thing to keep in mind is that a monster rally like we have just seen recently or like the one leading to the 1929 crash is not a normal occurrence. A six fold increase in the metals prices or in a general market in one fowl swoop is not sustainable and has to be corrected. Unfortunately a correction after a run that large has to retrace most of the gains until the market can mature to those levels.
Asia has been the driving force of the global economy. There are worries of Chinese growth dropping to 5-6% which is a huge drop. If you consider historical growth levels over the past 38 years in china, 5-6% is well below the average of 9.4%, but by definition of AVERAGE there are higher points and lower points. China has sustained a large amount of infrastructure growth that has to be grown into and adjusted to. Does this mean that the Chinese and Asian growth story is over? NO! It’s just taking a break. That break could be 2 years it could be 10.
We have a financial mess that has not been flushed out yet. There are over 700 trillion dollars of derivative products that have not been properly addressed, and when they are, whose balance sheets are they going to obliterate? After all, the world GDP is around 50 trillion. This mountain of paper is 12 times that value, supposedly.
We have had a few bright spots. Gold has performed relatively well compared to the rest of the market, still considering the overall global financial situation it seems to have disappointed the market. Gold has had its fluctuations and traded in a bit of a range. When it was on an up trend, the story was that it was a flight to safety and on the way down, the story was that the baby was being thrown out with the bath water.
The simple truth about gold is the following. For gold to truly go up to the $2000+ range and be that “safety currency”, it has to be a better alternative than all other currencies. As it stands now, the evidence shows that it is not. After all, where can you go and buy something with gold, even of high value like a home? It is an investment vehicle that people see as safe because it is a hard asset. For it to truly gain the kind of sky high value, it needs to become a currency, something you can transact and live with. That means that the entire currency market has to be in trouble.
For 09, I don’t see that as the case. There should still be an alternative within the currencies. That being said, I don’t think that we are going to see 500 dollar gold either. There is still a financial mess that hasn’t fully transpired so gold will be in demand. I see gold being priced in the 800-1200 dollar trading range. This is assuming that nothing catastrophic happens to the markets in the mean time. Moving forward, if none of the economic problems get solved, the late 2009 and beyond could be a time where gold could really break out.
Victor Goncalves
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All pricing information was taken from www.kitco.com, the LME, www.infomine.com. Moly inventories have been taken from a research piece form Sprott Asset Management.
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