A Melman Minute
| By | Leonard Melman |
|---|
NOTE: Due to pre-holiday travels on December 24 and the Boxing Day Holiday on December 26, we will not be publishing "Melman Minutes" for those dates so our next one will be prepared Monday, December 29th.
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While the petroleum complex and Russia continue to garner most of the world's financial headlines, when I look into 2015, I believe there is an issue of much greater possible consequence in terms of the future of the precious metals prices. I am referring to the technical position of the US Dollar Index.
Please note the almost incredible symmetry of the entire basing formation which has been building since 2004 and which now appears to be emerging strongly to the upside with today's rally to just under the '90' level, thereby exceeding (barely, to be sure) the highs of 2008-9 and 2011, leaving only the peaks of 2004 and 2006 near 92 as valid chart resistance. Should the DX rise above that level, I believe we would easily see a "mirror image" formed which would reflect - in reverse - the savage declines of 2002-4 when the DX collapsed from 120 to just 85 in 24 months.
If we have a reverse move of that speed and magnitude, we could see the DX rise steadily through 2015 - and it is difficult to credibly imagine any force which could be more negative for the precious metals during the coming year.
This long term chart appears to bear out that premise. Please note that when the DX was gradually strengthening during the period 1990-2002, precious metals prices were in the doldrums, to put things mildly. From 2002 to 2011, the US Dollar Index was in general retreat and those years were mostly positive, sometimes dramatically so, for the precious metals. However, since the 2011 bottom in the DX and as that Index began to show somewhat steady improvement, we have seen a renewed negative trend in the precious metals.
I can only hope that I am dead wrong, that the DX will once again collapse and the precious metals will move sharply higher. But the implications of this chart are difficult to ignore.
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Speaking of America, I have been reading some very interesting prognostications regarding the future of that economy, particularly as contrasted to some rather dismal predictions for economies in Japan, China, Europe and many emerging nations.
Along with many other publications, the Kiplinger organization just offered their forecast for the American economy for 2015 and they are quite bullish in their outlook. Among their statements, I noted this one which neatly summarizes their position: "…The U.S. economy, having found its footing in 2014, will gain momentum in 2015 even as Europe struggles to say out of recession, Japan remains sluggish and growth in emerging economies slows. Kiplinger expects the economy to grow at 3% or better…The Fed has a long runway…short term rates might not rise at all until the second half of the year…"
This forecast ties in with a recent statement by David McKay, chief executive of Canada's largest bank, the Royal Bank of Canada (RBC). He forecasts gains for the Canadian economy which will lead to his bank improving their profits in the coming year and he believes the source of the gains in the Canadian economy will be, as the Globe and Mail newspaper put things in writing about McKay's statement, "…The root of his optimism: the reawakening of the U.S. consumer."
Mr. McKay noted in a recent interview: "If you look at the driver of global growth and North American growth for many decades, it's been the U.S. consumer…For the first few years after the financial crisis, U.S. consumers were sleepy, burdened by debt and unable to find jobs…Those weights are now lifting and that means Canada's biggest trading partner is coming back to life." (Our emphases)
Personally, I have doubts regarding the credibility of many American economic reports, given the continual determination of the Fed to not raise interest rates and the US Congress to continue to accumulate huge new increments of debt - both of which should not be at all necessary in a truly robust economy - but an essential point is that if numerous economic leaders believe in America's coming prosperity, they will suit their actions to that belief, including buying into the US Dollar and also buying US stocks.
On that note, we cannot help but observe the almost incredible reversal to the upside of America's securities markets which took place in the second half of last week and which is continuing this morning with the Dow Industrials up by around 100 points - a move which has brought that index to within shouting range of yet another historic high.
Fallout from both the Russian debacle and the collapse of oil prices continues to mount and I plan to deal with those two important issues - each likely to produce a large share of dramatic headlines in the coming year - in our Melman Minute of December 29th.
In the meantime, please accept the best wishes of all of us at "The Melman Report" for a Meaningful and Merry Christmas and a Happy and prosperous coming New Year of 2015.
EARLY MONDAY DATA as of 8:00 AM PDT
Dow Industrials, 17,875, + 70
TSX Index, 14,456, - 11
Gold, $1,187, - $8
Silver, $15.85, - $0.15
Base metals, (average), unchanged
Mining share indexes (avg.), - 2.8%
US Dollar Index, 89.74, - 10 basis points
TYX Index (30-year bond rates), 2.779 + 05 basis points
Crude Oil, $55.95, - $1.18