On the Brink of Explosive Moves

Posted by David Bensimom & Michael Campbell

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Michael Campbell: I’m very pleased to welcome back to the show David Bensimon one of our favourite analysts. David is joining me live right now from Cambodia

David it was January actually of ’09 when you were on the air with us in the real depth of the financial crisis. Real estate prices were and the markets had collapsed. Our Canadian banks as an example were probably 60% 70% lower than they are today, a really black cloud. You said to me, “you know what I’m not worried at all about this”. That we’ve never had an example where “an event” like this credit crisis has derailed a major trend. And the major trend you have been chronicling for a number of years have been a prosperity driven commodity cycle. Meaning that demand for commodities was driving the upward price amongst other variables.

But this one was different because there was so much demand coming out of India and China, Brazil other countries like them. Obviously you were dead right about that as we have had a reassertion of the commodity trend in spades I’m excited to get your perspective on where we are with those cycles that you had outlined before .

David Bensimon: The first point to remember is that everything involves both fundamentals and technicals. The fundamentals as I’ve mentioned before allows us to identify what the direction is, whether we are going north or south. But they can’t tell us exactly the price points when the market’s going to stop and pull back. The technicals gives us that extra dimension of knowing where the intersections are where the traffic lights are, and where the specific junctures in price and time from a trading point of view, and really the combination of both fundamentals and technicals that give us the perspective. So in this case the story for gold goes back about more than 10 years already to the ’99 and 2001 major double bottom. Literally at that time I had identified this really very, very large scale combination of factors elements of price and time and geometry and structure of the chart, which allowed me to, or anyone who’s looking at those elements to identify a projection that gold needed to turn the corner from that double bottom at 252-260. And would climb over the course of 13 years tenfold increase in value that it would go from 260 to 2,600. Along the way we can expect certain turning points and various price levels and at various time points, and the market has indeed unfolded very well in adherence to those intermediate junctures.

From the bottom of the crisis in 2008 where it came back to tag on a weekly closing basis exactly what the high from 2006 was, That symmetry allowed us to project with increasing confidence that we would continue on this path towards the 2,600 in 2014. From recent levels now we’re at about 1,500, but say from a month ago we were at 1,300 represented a remaining balance of doubling in value to get to the ultimate target. From where we are now it’s less than a doubling in value over the course of what is about three years to go. So it really is not a very major, not a very aggressive percentage gain that’s required over the remaining time frame to get to that major objective. What’s interesting is that when you take into account the other elements of the US dollar which is a considerable component to the movement in the price of gold, but not the exclusive component, it represents part of that movement to come. But gold is going to outperform the general devaluation of the dollar and the general depreciation of the dollar. It will also do so not because of a fundamental side, not because of excessive tightness of supply and not from excessive demand industrially, but really from increases in demand from private investors, commercial investors, professional investors as well as central bank buying from Asia.

It’s that combination on the investment side which is leading to, or causing gold to outperform the dollar and to continue moving higher, very much in line with the expectation. You mentioned silver, silver has as you know from the books I wrote now almost five years ago was my number one favorite commodity that was covered in that text and the expectation was for silver to ultimately reach a level around the same time as gold that would represent the gold silver ratio moving down in favor of silver, down to a level of 15 which was the historical lows for that gold silver ratio. We are now at 30 which has been a substantial out performance of silver over the last six months or so as we’ve come from levels up at 70 or 80 down towards 30, this represents silver out performing gold. From the current area it only means that silver needs to out perform by two times gold to reach the ratio of 15. In actual dollar terms silver now is very close to its historical record high from January 1980 which was $50, and naturally you can expect some sort of reaction and resistance to that level. Whether the reaction is in the form of a very sharp plunge, or whether the reaction is in the form of a hovering just below the 50, we’ll see very shortly. But ultimately we’ll see silver will pass the $50 later this year and continue on it’s trajectory to reach its target which is around about $160 around the same time that gold is reaching 2,600.

Michael Campbell: It’s interesting as you say it’s a combination of factors and you look at a cyclical analysis and sophisticated relationships to create your timing models on mathematical relationships. On the other side as you alluded to there are fundamental reasons for this. How much of the movement is related to the US dollar? You just alluded to the fact that the driving force behind, for example, gold’s movement is diversification out of paper currencies out of the US dollar that’s still undergoing.

David Bensimon: I think you have to distinguish between different commodities and the component that the dollar plays in terms of their pricing. For gold the dollar plays a more substantial role. That is a considerable portion of the movement of gold can be attributed, not 100% of course, but a considerable portion can be attributed to a reflection of the US dollar. Other commodities like silver which has a much larger industrial component to the applications and the demand for silver is not as tightly correlated to the US dollar. When you look at other commodities like oil which are really purely industrial related, the dollar plays a lesser role. In any event a substantial movement in the general value of the dollar because of either monetary inflation printing of the money will have a general effect of on the price of all commodities. So to the extent that the dollar ultimately loses half its value that represents a natural doubling in value for these other assets. In the case of gold it will hold its own and will slightly outperform the dollar.

In the case of silver it will do twice as well as gold over the next few years. In the case of oil and copper these will do even more than twice as well because of the percentage movements and tighter elements of supply and demand, which actually brings up the issue of where we are right now in terms of supply and demand for some of these commodities, particularly on the industrial side. The two elements that have been driving the markets in the last couple of months have been on the supply side the risk premium because of issues in Libya and the Middle East which have given a higher price range for oil than otherwise would be the case. Similarly on the demand side we’ve seen the crisis in Japan with the triple crisis of earthquake, tsunami and nuclear which have led to a sense of reduction of demand which would normally lower the price of oil. But there has been an interpretation that this crisis will pass and not have a lingering effect, and therefore it’s been overwhelmed by the supply side. I think ultimately what we are going to find is that the supply is going to resolve itself and I’m not very bearish on the situation in the Middle East. I think that it’s not going to have a lingering and Japan as well will resolve itself.

Ultimately we are going to look at real demand and real growth from around the world that will continue driving these commodities higher over the course of the rest of 2011 and throughout 2012. So we’ve got 18 more months in this round so to speak of substantial up side. A lot of this can be represented by movements in the equity markets.

Michael Campbell: A lot of people are shocked that the way the markets since March 9th 2009 have been able to move up inexorably against a background of super negative news without any really serious correction.

David Bensimon: If we are looking back all the way to March 2009 you know we’re already two years into this multi year sequence. The initial really sharp up swing which was about 100% in the case of some of the equity indices around the world and more than a tripling in value with some of the commodities copper in particular. The initial movement off the lows of course is a, was a natural reaction to being a little bit over sold at the maximum fear of the market crisis. At the same time was powered by this vast increase in money supply that naturally weighs nominal price level of all these assets. But as we got into 2010 we had a pull back in the towards the second quarter middle of the year. From that point to middle of 2010 the last year has been really quite steadily upwards as you noted for stocks and commodities. This has reflected this last year the resurgence of economic growth particularly in Asia which has been powering ahead, and other parts of the world as well have been joining in. Of course there are some head winds here and there I mean Europe has its own debt kind of issues to work out and it’s always moving a little bit slower than everything else. But it will work its way through and US as well with its debt overhang has been slower to turn the corner. It’s been assisted and helped out of the doldrums by the maintenance of really low interest rates, which has helped to bring equity values up at the expense of the US dollar. So you might recall at one time I mentioned that over the larger span of time of these five to eight years, that we are in now, really you can put everything on the table into one of two camps, or one of two sides of the table. One side is the US dollar and US bonds and fixed income securities and on the other side is everything else that is equities, commodities and currencies. Generally these two groups are moving in opposite direction, that when the dollar is going down and the bonds are going down because of rising interest rates then everything else is going up because of this inflationary force.

Nothing goes in straight line though, and occasionally you will have reversal and you will have the appearance of the dollar going up and bonds bouncing up and everything else taking a corrective decline. If we look specifically at the equity markets your listeners who were in Vancouver back in February will recall that I had mentioned that there was a very large structure for the S&P which like gold has been in this multi-year advance and has a target, a long held target that I’ve had for more than decade that we will eventually reach in 2016, a little bit later than the highs for gold. In 2016 we’ll reach some high for equity markets and in particular for the S&P at 3,600. From current levels above 1,200 we’re now at 1,360 but from 1,200 it represents a tripling in value. So that’s more than three times from where we are now over the course of another five years. So it’s not an aggressive percentage for the remaining distance particularly when it’s facilitated by this extra layer of monetary inflation.

Specifically for what I had said back in February the market has been adhering very nicely. In fact from the bottom of 2009 the S&P went up 550 points which was a perfect almost to the point. From a bottom in July 2010 it has continued moving up with very similar patterns of symmetry and proportionality that followed a very specific rhythm.

From that bottom in at 1,250 the market has recovered as expected and the next level that I had projected was 1,360. In fact in the most recent report that I did from middle April, I said that during this month which we are just finishing now that the S&P needed to recover from 1,300 up to 1,365 and we literally closed last week at 1,363 now 1,364. And so we’re now here now at the anticipated resistance level. So what do I expect from reaching this target? I expect that we will have a very modest, say only about a 2% dip next week which could take us right back to tag that familiar inflection point of 1,332. and that if by holding at that level it would give the market confidence to power ahead to the next target which are at 1,440 and 1,560.

And the percentage movements to get from where we are now at 1,360 up to 1,560 is another 200 points or only about a 15% movement. Sometimes it’s important to bear in mind the percentages and not just the raw points because as you move through time the points can look big or look small depending on what the absolute level is, the percentages are more pertinent. In this case the time frame to reach 1,560 is only to the middle of July. So that’s only a few months from now and so I anticipate a 2% dip then 15% climb to the middle of the year then you will have a sharper pull back which would be a natural continuation. And if you look further ahead to the end of 2011 and into 2012, I am expecting with the general recovery and economic growth around the world and stronger equity markets generally, I would be looking for the S&P to power up to 1,900. Then ultimately finish in 2012 at about 2,400, then having a bigger drop in 2013, then resuming in a somewhat more choppy fashion compared with the fluid fashion that we’ve had generally in the last year or so, but a somewhat more choppy fashion to move up towards its final objective at 3,600 in 2016. So that’s the big picture view of how these markets should unfold and as always it’s a question of individual investors and traders looking at their own risk tolerances and portfolios and all various different elements to go into what is the most appropriate way to trade these kind of instruments, what leverages and so on are appropriate for any individual. But from a pure market perspective my expectation is we’ll see these up and downs as the market unfolds towards its targeted 2016.

Michael Campbell: David Bensimon is head of Polar Pacific he’s also going to be in Calgary Thursday June 2nd and he’s going to be in Vancouver Tuesday June 7th both at the Fairmont’s Palliser in Calgary Fairmont’s Pacific Rim in Vancouver, talking about the TSX Canadian dollar, oil, gold and the Stock Market. Just go to www.moneytalks.net David’s picture is right there from and centre click on that for details.