Friday, August 5, 2011

NIA New Email - 8/4/11

NIA would like to wish President Obama a Happy Birthday and we hope that he enjoys his birthday present, a more than 500 point drop in the Dow Jones, its largest single day point drop since October of 2008.
The Dow Jones fell today by 512.76 points to 11,383.68, a percentage decline of 4.3%. The Nasdaq declined 5.1% today with the S&P down 4.8%.
The Dow Jones/Gold ratio is now down to 6.9 and is rapidly approaching NIA's prediction for the Dow Jones/Gold ratio to decline this year to 6.5. NIA made this prediction in its top 10 predictions for 2011 on January 4th when the ratio was 8.1.
From an economic standpoint, NIA considers this decline to be a sharp correction due to the world waking up and realizing that the U.S. economic recovery is phony. 1Q GDP growth was recently revised downward by 81% from 1.91% to 0.36%. There is now a strong likelihood of U.S. GDP going negative by the end of 2011, which means the U.S. economy will officially enter a double-dip recession. It is NIA's belief that the recession never ended and we are headed towards a hyperinflationary depression.
From a technical standpoint, NIA believes that today's huge drop was triggered by margin calls. Before yesterday, the market had declined eight days in a row for a total point drop of 857.79. Many investors who didn't have cash to cover these margin calls were forced to liquidate their stock holdings. With all of the U.S. economic uncertainties today, there is a lack of buying in U.S. stocks. Margin call sellers had to take anything they could get for their shares. Some investors were even forced to liquidate their gold and silver in order to cover margin calls, which drove the U.S. dollar and U.S. treasury prices temporarily higher.
If this was late-2008/early-2009, gold would have dropped a lot more than the $7.40 it sold off today. The fact that gold fell so little during a major margin call forced liquidation situation is extremely bullish for where gold is headed by the end of this year.
Today did highlight why for some people gold is better than silver. NIA has always stressed that in order to triple or quadruple your purchasing power this decade by owning silver as opposed to gold, you need to be ready for silver's volatility. Silver's percentage decline today was 13 times larger than gold's percentage decline. For some people, this volatility is simply too much to stomach and they rather just own gold, the safest and most stable asset in the world.
Yesterday evening with the Gold/Silver ratio at 40, we said silver would only slightly outperform gold over the next five months. After today's dip in silver to $38.92 per ounce and rise in the Gold/Silver ratio to 42.4, silver is now a lot more attractive for the short-term than it was yesterday evening.
This stock market correction will not turn into a crash like in late-2008/early-2009. Back then we had a liquidity crisis, but with interest rates today near zero and having been there for over two years, the world is now flooded with excess liquidity of U.S. dollars. Stocks became overvalued in recent months with the Dow Jones/Gold ratio reaching a high on May 5th of 8.36 and were overdue for a large correction. If the stock market continues to fall, we will soon hear from the Federal Reserve who will either unleash QE3 in disguise or act to push the $1.6 trillion in excess reserves of banks into the economy. By the end of 2011, we expect gold and silver stocks to decouple from the rest of the market and for many of them to reach new highs.

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