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Could Dubai Trigger Cataclysmic C Wave Down?
Category: Investment, Gold, Mining, Middle East Market
By Gold Economist: Jay Taylor
Goldinvestor.com
December 4, 2009
The news of a bankrupt Dubai sent shivers through the global economy toward the end of this week. Immediately, the damage would seem to hit the European banks the hardest, as they hold 72% of cross-border banking exposure to that tiny, tax-free, corporate country built on huge oil wealth. While only 7% of Dubai debt is from the U.S., a full 41% of Dubai debt is owed to British banks, which are after all the other part of the Anglo-American empire.
Recently, Dennis Gartman stated the following in his daily missive:
"Finally, and perhaps most importantly, we fear that this news might be the news that tends to push equities around the world over the edge; that brings on a trend toward global protectionism and that pushes the US dollar materially higher…and perhaps violently so. We hope we are wrong; indeed, we pray that we are terribly so, but we fear that we are not. The long Thanksgiving holiday will give everyone the chance to collectively breathe and consider what has happened in the Gulf. Perhaps cooler heads shall prevail as the next several days pass, and perhaps this situation will simply devolve into memory and into nothing; but we fear this is a far larger story than it appears even this morning and if it is we may be surprised by how strong the dollar becomes…and how swiftly it does so.
"The commodities markets have now become a trade completely divorced from the bullish or bearish fundamentals that we would like the markets to focus upon and have instead become the domain of the margin clerks, of panic liquidation, of uncertainty and of confusion."
Now check out the following from Dr. Robert McHugh in his weekend issue of "Technical Indicator Index," which you can access via www.technicalindicatorindex.com.
"We recently showed you an amazing confluence of time, price, trend-line and pattern that points to a possible top for a wave (B) now. Specifically, November 16thand 17th were important time dates. Well, interestingly, as of Friday, November 20th, the intra day top sits at November 17th's 1,110.32. For the Industrials, the intraday and closing tops sit on November 17th's 10, 438.17 and 10,437.42. The closing top in the Industrials sits very close to the 10,375.50 percent retrace level of the decline from October 2007 through March 2009. No guarantees, but it is increasingly looking as if wave (B) topped at this convergence and (C) down is in its infant stages.
"There are developing short-term Head & Shoulder tops in both the Industrials and the S&P 500 with downside targets of 10,000 and 1,060. There is also a Bearish Divergence between the industrials which hit a new high and the Transports which did not on an intraday basis. Trannies did confirm the new high n the Industrials on a closing basis, which was a short-term Bullish event under a strict interpretation of Dow Theory, however intraday this Bearish Divergence raises concerns and may trump the Dow Theory confirmation if all the other myriad Bearish warnings we will present this weekend prove correct, that a decline of monumental proportions is at hand. This decline could start out slowly, with the Bullish seasonal tendencies of the year end holding season mitigating the early damage. However,, if catastrophic wave (C) down is starting now, as we suspect, this decline will include several periods of fearful crashes along its path of destruction over several years. Cash will be important."
We don't know yet whether the $80 billion non-payable debt owed to various international banks will prove to be the catalyst that ends the (B) wave up and triggers the (C) cataclysmic nation changing wave down. But if it is, rest assured that everything will get taken down initially. As Dennis Gartman noted, the margin clerks are starting to make their calls, and when the margin clerk calls, we expect the dollar will get stronger, just as it did last fall.
Why? Because U.S. dollar debt represents a short against the currency. When the margin clerk calls, everything that can be sold must be sold, including gold mining stocks. That means the demand for dollars rises dramatically, which is why (as Bob Hoye has noted) during a major credit contraction like the one we are in now, the "senior currency" gets stronger because it is the currency with the most debt—hence, the most demand for its purchase when the risk trade is reversed.
Yesterday and today we started to see this dynamic in motion again. Will it be the start of what we have been prematurely looking for over the past several months when we suggested you take some profits out of the gold stocks to (A) increase cash for purchase of gold shares after they crash, and (B) buy some hedges that can help you protect your portfolio as your gold shares and everything else around you crashes?
Regarding equity hedges, please note we are recommending that you sell SDS and use the proceeds to either buy the Prudent Bear Fund or the straight S&P 500 short, which trades under the symbol SH. After speaking with Kevin Duffy and Bill Laggner on my radio program a couple of weeks back, I have become convinced these are not the optimal equity market hedge vehicles. And regarding all hedge instruments, we take the warnings of Dr. Robert McHugh, who also spoke on my radio program. Robert said some of these short plays may be good early in the decline. But be aware that as the system implodes many may not be solvent and thus you may not get paid, even if you have chosen the correct side of the market!
Jay Taylor - Mr. Taylor is editor of J Taylor's Gold, Energy & Techn Stocks newsletter. A native of Ohio, he has resided in New York since 1973 when he began working there for Barlcay's Bank International. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares.
In 1981 he began publishing North American Gold Mining Stocks, which preceded his current newsletter. His continuing interest in gold mining prompted him to study geology at Hunter College in New York City, supplementing his MBA in Finance & Investments. Throughout his career Mr. Taylor worked as a commercial, then as an investment banker. Most recently, he worked in the mining and metals group of ING Barings in New York. Prior to that he was involved in the first gold loan made in modern times in the U.S. to Amax Minerals, a 250,000 oz. loan facility led by Citicorp.
In 1997 he resigned from ING Barings to devote himself full time to researching mining & technology stocks, writing his newsletter and assisting companies in raising venture capital.
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