September 4, 2012
With the Bernanke speech out of the way all eyes are now directed toward Draghi and the ECB. There was no QE3 announced by Bernanke at Jackson Hole, no defined QE3 promised by Bernanke in the future, only a continued promise to do something if necessary. The real stimulus will come out of Europe and has just begun. The same is true of China. This is what I believe is rallying the market and gold -- not anything Bernanke said.
The nature of the ECB is changing. The mandate is expanding. The ECB is morfing into the Fed. This should not be surprising since most of Europe is in, or going into recession. The banking system is fragile and sovereign nations are debt ridden. Europe needs a strong central bank to supply liquidity, bridge loans, and a financial safety net. As long as they accomplish this within the context of maintaining price stability, there should be no major negatives as a result. We've seen it can be done. The US banking system is stable, even though it was on the brink of collapse four years ago. More, the value of the dollar and the US price level has remained relatively stable.
But, as you've seen, central banks cannot create prosperity. They cannot stimulate their way to greater employment. All central banks can do is to be a responsible lender of last resort, and combat inflation and deflation. In today's world it is deflation through de-leveraging that is the major threat. You can count on the Fed, China, and now the ECB to increase the money supply to ease the recessionary/deflationary bias running rampant in the world today. Gold has reversed from the $1530 level as the deflationary threat has reversed.
As the major central banks of the world make their move, so will resource stocks throughout the world. Resource stocks have been under pressure for over a year as demand for most of their products have dwindled. In most cases, the supply of commodities have been increasing and the demand decreasing. Governments have been stock piling commodities adding to a huge overhang of inventories, further depressing prices. Since April of last year the CRB has fallen from 370 to 266 as of June of this year. Since that low commodities, led by gold, have moved back up.
I began loading up on resource stocks in May, and while they have generally moved higher they have not yet made a convincing run to the upside. I think that is about to change. The markets have digested the fact that there will be no major change in monetary policy in the US, but it is becoming more clear that there is movement in both China and Europe to stimulate. I seriously doubt that there will be any attempt to reflate the world economy in any major way, but I have no doubt that every attempt will be made to fight deflation.
Now that the ECB is gaining new tools, and joining the battle, that fight will be easier to win. The recessionary/deflationary bias that has plagued the world is about to be replaced with a mild inflationary expansion. China, Europe, and the US are all poised to ease monetary policy a notch or two. That in itself should be sufficient to end the bear market in commodities.
The snap back we have seen in both commodities and many resource stocks in the last few months, sense this. And since many stocks are still down 50% and many still near their lows, there is a lot of room to run. I am "all in" and leveraged to take advantage of one of the better moves I think is coming in the resource sector over the next several months. As of this witting I have repurchased CDE, PAAS, and GDXJ. I also added NG to my portfolio.