Weekend Strategy Review 6/12/16

Posted by OMS  at June 12th, 2016

The Dow fell 120 points on Friday, closing at 17,865.   It was up 58 points for the week.  The NASDAQ finished down 65 points on Friday and up 48 points for the week.

Friday’s decline appeared to be part of a 3-3- 5 corrective sequence within wave ‘C’ up of Major Wave 2 up.  The trading action was enough to turn two of the breadth indicators that make up The Tide negative.  So given that we know the final wave in any corrective pattern has a high probability of truncating ‘C’, we will need to watch the indicators very closely in the days ahead.

One of the reasons we need to be on our toes now is because of what’s happening in the United Kingdom.   On Thursday, June 23, the Brits will be voting to decide whether they want to Stay or Leave the European Union (EU).  This vote will have significant consequences for the British Pound (BP), the Dollar and world markets. We might have seen the start of this yesterday, as a poll showed the Leave voters with a 10-point lead over the Stays.  Until yesterday, the polls have been very close, so yesterday’s wide lead came as a surprise to world markets. 

The general consensus for a Leave vote is that it would be a short-term negative for the British economy, and cause the pound and British stocks to fall.  The loss of a key trading partner would also impact EU nations, causing their currency, the Euro, to fall as well.  The turmoil it will cause will likely result in a run to the Dollar, because it is still perceived as a safe haven.

This should will also impact the price of gold.

Now in normal times, as I discussed in my recent Update webinar, the price of gold is usually inversely related to the Dollar.  A stronger Dollar usually means a decline in gold (and other commodities).  However, this might not be the case this time.

The reason I say this is because George Soros, the Hungarian-born investor and philanthropist who has amassed a more than $20 billion fortune, is buying gold. Over the years, Soros has made enormous bets on bonds, stocks and currencies.  In 1992, a short sale of the British pound earned him the title of “The Man Who Broke the Bank of England.”  So now, with the possibility of a British exit (Brexit) from the EU, Mr. Soros is buying gold.  Hmmm?

Now don’t get me wrong. I don’t like George Soros. His support for the Democratic Party makes me sick!  But I can understand why George supports the Democrats.  He’s a businessman and because they control the White House, he can use his Billions to buy influence.  Warren Buffett is the same way.  He stuffs the pockets of the Dems to keep the pipeline from moving oil out of North Dakota.  A new pipeline would put a damper on Burlington Northern’s profits, so he makes tax deductible contributions to the party in power to ensure the pipeline doesn’t get built.  Hey, I’m not telling you anything new here.  This is how the American political system works.  Money buys influence.  It’s one of the reasons guys like Trump and Sanders are so popular now.  Most Americans are sick of the current system that allows the guys with big money to buy political favor.  I hate it!  Guys like Soros and Buffett are not investors.  They’re manipulators.  Soros cost the U.K. over 3 Billion pounds before he was done.  Three Billion Pounds was a LOT of money back then.  He got rich; the people in the UK paid the price..

But no matter if you agree or disagree with the politics of George Soros or Warren Buffett, you might want to pay attention to what they do.  They didn’t make their Billions by being dumb.

So when Mr. Soros bought 19.4 million shares of Barrick Gold, (ABX), in the first quarter of 2016, I took note.  As of March 31, ABX was one of Mr. Soros’ largest holdings.  ABX comprises 7.36% of his public equity portfolio.  That’s a pretty big bet on one company.  It’s also tells you a lot about how he feels about gold.

If the UK votes to leave the EU on the 23^rd, it would tend to weaken the British Pound (GBP) relative to the Dollar.  A strong dollar would normally mean a weaker Euro and like I said in the webinar…weaker gold prices.  So you have to wonder why Mr. Soros’ is buying all that gold?   Hmmm?

Maybe Mr. Soros doesn’t believe the Brexit will happen? Or maybe he sees something else?

George Soros has a history of looking at the Bigger Picture.  In 2007, he smelled trouble in the real estate market, when the sector was pushing all-time highs.  He made Billions by betting against the market.  He’s the kind of guy who takes full advantage of the system, and bets against it when he sees opportunity.

Right now, I believe Mr. Soros sees that political systems around the world are in deep trouble.  When I say ‘trouble’ I mean massive debt.  In my Update webinar, I talked about the U.S. debt and how a doubling in the number of senior citizens by 2050 will only make it worse.  The huge amount of money required to service this debt and pay for social security and health care, will continue to be a headwind for equity markets in the years ahead.  It could also trigger a deflationary spiral that will affect the global economy.  Deflation is not a good thing.  It could cause world markets to tank.  This would cause Central Bankers to start massive QE type stimulus programs to help boost their economies.  If this happens, gold could be a very nice place to be.

Right now, UDN, the inverse ETF for the U.S. Dollar is still on the Dean’s List.  So as long as it stays on the List, it’s telling us that the Dollar is weak relative to most currencies.  And with a weak Dollar, we’re seeing lots of gold and silver stocks high on the Dean’s List.  So for now, the historical inverse relationship between gold and the Dollar appears to be holding. 

But as we get closer to the 23 June referendum, you might want to pay close attention to the Dean’s List to see if this historical relationship between the Dollar and gold will continue to hold.  If it doesn’t and both start to rise, it probably spells major trouble ahead.  Actually, I should write that as MAJOR TROUBLE!

Last week, Janet Yellen said a UK vote to leave the EU could have “significant economic repercussions”. Listening to her comment, I heard the same type of Fed speak I heard when Alan Greenspan talked about “irrational exuberance” just before the market crashed in the dot-com bubble.

Hmmm?  Maybe this is why Mr. Soros is buying gold.

Have a great weekend.

That’s what I’m doing,

h

BTW, If you haven’t seen my Update Webinar, do yourself a favor and get a copy. Don’t be ‘pound’ foolish.

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