The Lag Between Cause and Effect:
What to Expect in 2009 and Beyond
By James M. Carrillo, Sr. Broker SATC
January 12, 2009

Many people are wondering why gold isn’t exploding upwards while others believe gold has topped out and is set to decline. The truth is most likely someplace in between the two as the battle between bulls and bears rages on.

My views will always be based on both technical and fundamental analysis. I use both to make my decisions not only on where I work but where I store my money. Last year I was a firm believer that the stock market was grossly over valued, profits vs. earnings were skewed and that at some point the technical aspects would reflect the fundamentals. In January of 2008 many of you know how adamant I became about an imminent decline in the stock market. Why? I used both technical and fundamental analysis.

In 2007 the fundamentals were saying that PE ratios were out of whack and that the housing boom was bust, everything said sell yet the market continued to climb. Why? Technically stocks were still in a bull market. Traders and money managers will stay long despite fundamentals until they get a technical sell signal. When you get both technical and fundamental signals money will be made. You have most likely heard “buy the dips” or “sell the rallies” many times.

As can be seen by the chart below the market I use to monitor the health of the S&P 500. It was in an upward march from the technical break out in the 2nd quarter of 2003 until the technical breakout to the downside in December of 2007. This is why I became a huge stock bear. BOTH Technical and fundamental factors screamed SELL. But it wasn't until May 2008 that the effect began to be felt.

S&P 500 Stocks

Why did gold go down? The enormity of the losses in stocks completely destroyed brokerage company profits and balance sheets, leading to the meltdown of the financial institutions and companies were awash in debt. Hedge companies went bust, banks went bust and you know the rest. The only asset class that had made money was commodities, which were later destroyed by the weak fundamentals of the economy. They then declined rapidly once the technical aspects confirmed the fact in September of 2008. Once again notice the lag between cause and effect.

Commodity Index Chart 2000-2009

Money poured out of all paper assets and flooded into the liquidity of dollars. As I have told many of you I think this will go down as the worst move ever made. Kind of like jumping out of a hot frying pan directly into the fire itself. Why did the dollar rise? When you sell assets like stocks and commodities those funds are initially converted into dollars. In essence you and everyone else was buying dollars which reversed its course rapidly. This led to a decline in Gold prices even though the fundamentals said buy , buy, buy gold. The technical side became short term weak and the dollar,despite its horrid fundamentals technically, became a buy! This signal in my opinion was to be avoided because it is NOT confirmed fundamentally. As explained later in this article on money supply growth.

U.S. Dollar

The dollar now is still on the buy side however the fundamentals say stay the heck OUT. A monthly close below the .79 cent level triggers another massive sell signal confirmed by gold's break which did not happen in 2005 which is why it is an unconfirmed buy and also based on extremely poor fundamentals.

Why are the U. S. Dollars fundamentals so bad? Mass creation! If you take the time to look at the Federal Reserve site and look up the money supply growth you will note that we have created/printed more dollars in the past 3 months than in almost the entire history of the federal reserve! They are not done yet. This new money is backed by ONLY the full faith and credit of the United States which has lost faith Internationally, and within our own borders, and has its credit being downgraded worldwide. If it were you and me they would be repossessing the house.

GOLD Analysis

One thing that should be apparent by now is the lag between cause and effect. In 2007 there was no fundamental reason for stocks to be rising except the technical aspects of the market were still in place. There was no reason for commodity prices to continue their upward spiral until July of 2008 with world economies melting down. There was no reason for the dollar to explode upward with such dismal fundamentals.

Go back and note the S&P 500 graph. See after the break below the moving averages how the market then snapped back to the break point before the huge downward plunge. If we are at all lucky this pattern will occur in gold in order to give us all a chance to accumulate.

Note on the chart below we know the fundamentals are with gold to rise, but as of the close of January 31, 2008 we have the confirmed a major break technically! The last piece of the puzzle will be the double confirmation with the dollar breaking below .79 cents. If you aren't in gold by then you may find yourself chasing a move that could be one of the most explosive in history. If there is any supply.

GOLD

Gold actually posted a 5.5% gain in 2008 despite the financial ruins of most markets and a rising dollar. Gold is the anti-dollar and it mirrors its value. Based on my research on both the fundamental supply shortages and huge worldwide demand of gold coupled with the unprecedented mass creation of paper dollars, terribly weak stock technical and fundamental appeal, it appears Gold will be the best play of the next few years. If we are lucky we will get a choppy sideways pattern until August with a moon shot move up into 2010. However my stance is better a year too early than 5 minutes too late. Accumulate gold now before the dollar falls into the abyss.

Predictions

Yes predictions, they are based on over 30 years of experience. No feather in my cap but my overall track record speaks for itself. In 1978 I began buying gold as a college student studying economics and gained a position with one of the premier precious metals dealers in the country. I noted that markets were going to turn when interest rates hit 20% and they did. In 1982 I became a stock and commodity broker. In 1986 I also joined a firm to deal with what I saw as a coming boom," information technology". That worked out very well. In 1999 I saw the rapid money supply growth prior to Y2K and started watching gold again very closely. After 9/11 I saw more money creation. Then gold finally gave me the technical buy signal.To couple with its fundamentals, I began buying. In 2004 due to unrealistic low interest rates due to 9/11. I told my wife we just won the lottery in real estate and convinced her (that was not easy) that we should sell all of our real estate and go to gold rather than cash and relocate the family to Arizona, pay cash for a modest home and let the economy go through what I felt would be a major adjustment. Family and friends thought I had lost my mind. In 2004 I decided to come to Swiss America rather than just sit around watching my investments. There are those who make things happen; those who watch things happen; and those who don't know what the heck happened.

2009-2010

STOCKS - Will chop in a wide range as base building begins. I see a new low in the second through fourth quarter of 2009. The Dow will base build after this new low possibly in the 6,000-5,000 area for about 5 years. However, it could get worse. Personal Credit will doom many more banks, unemployment will surge, many businesses will go bankrupt or close their doors in the 1st half of '09. A record number of Municipalities will fail. States will be needing bailout money. Don't be tempted this year. Stay away.

REAL ESTATE - A bottom will hit after 2009 but the doom and gloom will spread to the Commercial sector. I see massive problems in commercial real estate in '09. Their will be bargains if you go to the banks themselves but use the site www.zillow.com and try not to pay MUCH more than the 1999 price. Yes 1999.

U.S. DOLLAR - Will sink by 10% - 20% or more by 2010.

GOLD - Could go to $2,000.00 very rapidly by the end of 2010. This is highly unpredictable but should be amazingly profitable.

BONDS/Bills/CD's- If you like negative yields for safety go for it. I prefer to wait for the double digit rates coming in a few years when the economy is deemed stable. At that point the Fed will be jacking up interest rates to slow down the inflation that they caused by the mass printing of dollars.

Remember there is always a lag between cause and effect. Buy Gold and wait, don't wait to buy gold!


Read more from Jim Carrillo
in Swiss America 2009 Special Report: Surviving & Thriving
The Coming Financial Storm

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