The War is Only Part of the Problem

Victor Hugo, Mar 6/03

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Every time a TV programme runs a story about the prospects of war in Iraq, the commentators sprout how good it will be when there is certainty - whether the war is on or off. I have only heard the occasional dissenting voice who have considered what the markets will do after the initial "certainty" jerk.

It is still so comforting to rely on the hope that they will be a major sustained market rally or recovery once there is certainty on the war front. Of course the war on/off question affects confidence, but the essence is more importantly, what are the prospects for global economic growth in the next two or three years -- and whether the US can again manage to fuel that growth, the way it did since the crises in 1997 and 1998.

Unfortunately the answer is -- no, it can't. The burden of the US's national expenditure -- and personal, corporate, Federal and National debt plus a now unmanageable trade deficit, plus war and terrorism costs -- is just too big. How can I say this without quoting reams of company earnings, debt default, debt refinancing, bond price, unemployment, property bubble, and other economic data? No need to. The US$ is saying it all.

Money is moving out of the US and out of the US$. Some of the move is being motivated by fears of the war and its aftermath going wrong for America. How much of the money moving out? Impossible to say -- but logic suggests that the underlying problem is not the war and its consequences.

The problem is that war or no war, neither the US nor its major trading partners are going to grow enough in the next two years, to avoid one of the biggest wealth destructions in history -- affecting virtually every asset class worldwide. Gold will be one exception. A successful war is not going to solve the growth problem soon enough -- even though the oil price may benefit after the fires are put out.

The June US$ futures index, representing a weighted basket of currencies relative to the US$, was at 98.29 as this was being written. Down from the 120.00 area a bit more than a year ago, the trend relative to various cycle scenarios, shows evidence that there will be acceleration to weaker, with behavioural counts suggesting scope for a 20 to 30% weaker US$ in the next 15 to 24 months. Sceptics who criticise the concept of behavioural counts which can change along the way -- forget that just about anything can change along the way. Yet it would need a major change of policy in the US and a change to confidence globally. It would take a massive shift in attitudes and expectations.

More corroboration comes from Wall Street. The Dow Jones Industrial Average is trading at 7674, with critical points on various momentum swings favouring scope for an accelerating dump soon.

This is a market still partially in denial about prospects for an extended bear. Partially in acceptance as well. But not yet in capitulation or resigned dump at all costs mood, typical of the mature bear. This is still the adolescent bear. Our systems call the DJIA to a soft landing near 3000 and a hard landing near 1890 sometime in the next two years. Perhaps this comment gives some idea of the scale of scope for impending tumult, worse than the 1930s.

Based on what the market is doing, what it has done and what is feasible based on current expectations -- as well as the debt and inadequate growth fundamentals -- the dump capitulation may be imminent. If the US now moves into Iraq, without the blessing of international community, there'll be even more pressure on Wall Street and the US$ and all the domino effect that implies, a trigger, not the cause of the dump. History will show that the cause is the debt - with slowing global economic growth. The Butcher of Baghdad backing off would feed some euphoria - but other unpleasant realities would soon revive.

What about Gold? The counts say that two potential scenarios are underway - either a run any day now [minor cycle pivots say somewhere between now and 23rd March] -- or more sideways consolidation until mid-May. Either way, I am expecting the $Gold price to be well above $400 by midyear. Relative to the 2.0 standard deviation linear regression range since April 2001 -- I put key support at $328.00 -- but having regard to the momentum signatures, do not really expect any sustained moves below $337 in coming weeks. All it needs is gapping acceleration or a weekly close above $362, to persuade many investors not to risk missing the boat. The next major target is at $412 then $443.

For JSE investors, a stronger Rand may be a complicating or delaying factor before gold shares run. Yet we have done some extensive analysis on the Rand elsewhere -- and that concludes that there is tentative evidence for some Rand weakness next -- and if that happens with a stronger $Gold price -- the next rocket would be lit. When it comes out that central bankers' vaults are perhaps half empty and distrust of the US$ grows -- a $1000 Gold price would not sound so fanciful and would dwarf Rand strength.

In the meantime, JSE industrials, financials and most resources shares other than golds are very vulnerable. Although gold shares can also take a beating initially if world stock markets dump -- they should be among the first to recover and then go on to new highs.

Best regards
Victor Hugo

www.HugoCapital.com
www.saGOLDS.com
www.GOLDSignals.com

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