Whilst property is on the verge of tipping over into the 'capitulation' stage of its bull market, gold and silver stocks look like much better long-term prospects - though be sure to play the current correction properly.
Some of you may have seen Tom Fischer of Herriott Watt University's excellent charts measuring UK house prices in ounces of gold in last week's MoneyWeek. Tom is a (renting) German mathematician lecturing up in Edinburgh. Our national obsession with house prices and indeed the house prices themselves have both stunned and mystified him.
Below is an updated version of one of Tom's charts. Underneath it is a wonderful chart from Jean-Paul Rodrigue, PhD, from the Department of Economics and Geography at Hofstra University, New York. I urge you to spend a moment or three studying it. It displays the course of a typical bull market from take-off to landing.
Now, can you spot the difference?
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UK housing, measured in gold, is tracing out exactly the pattern. We are at the early stages of Fear. Next comes Capitulation.
Of course, these are just two charts that share similar patterns. You could find another chart that looks similar but turns and heads on up and use that to argue that UK house prices will rise in gold ounces. And remember of course, that these charts measure housing in gold. Any nominal falls in sterling are not likely to be anything like as dramatic, because of that wonderful thing called money supply growth
Nevertheless, you have been warned. Buy-to-live? Maybe. Buy-to-let? No.
Where next for silver?
On the day of the UK Silver Investment Summit last week, silver burst up through $15 to a new twenty-eight year high at almost $16. Everyone, including yours truly, was overwhelmed with euphoric, bullish sentiment, even though I'd been warning of an imminent correction.
As always seems to be the case with communal, euphoric, bullish sentiment, we got slapped in the face. Silver has been in decline ever since. Even Marc Faber, the uber gold bull, emailed me over the weekend saying, "I think gold will now also correct. Dollar should bottom after a final sell-off at least for a while".
As you can see from the chart below, gold is right at the top of a long-term resistance trend line.
I'm suspect now is not the time to be buying gold and silver stocks. I fear this correction may take three to six weeks to unfold. Then will be the time to strike.
But now is the time to be researching gold and silver stocks, finding ones you like, and setting price targets.
Even though both silver and junior miners have lagged gold in this recent move, if past performance is anything to go by, it is likely they will sell off harder in a correction. That means there should be some bargains to be had. Have some cash ready.
For what it's worth, and no one can read the future, so don't believe a word I say, but: I have gold finding support at $790. If that breaks, as I fear it will, we go to $765-$770. After that $725, around the May 2006 highs, $712 and worst case $660, though I doubt we will see that. Most likely it will hold at $765 or $770. That would be a natural, normal, healthy bull market correction.
Silver might go to $14.20. If that breaks, $13.20. I'd be surprised to see it below there, but anything's possible if things get really nasty.
That said, the markets will probably turn round tomorrow and go straight back up.
By the way, before I go, if you are interested in shorter-term trading, I would recommend listening to Michael Hampton, the trader, in the second half of the latest Commodity Watch Radio about 21.5 minutes in. Michael's market timing is excellent and he gives some good fundamental and technical reasons why we are at a turn. Broadly speaking, he sees the yen strengthening and stock markets diving.
And don't forget you can read more about the Silver Investment Summit and all of the stock tips I picked up there in the next issue of MoneyWeek, out on Friday. If you're not already a subscriber, then you can sign up for three free issues here: Free trial.
Turning to the wider markets
In London, the FTSE 100 index of leading shares ended yesterday 24 points higher at 6,362 having earlier hit a low of 6,279. Vodafone led the risers with a gain of over 7% after raising its operating profit forecasts. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 pulled back earlier losses as Wall Street opened higher to close up 3 points, at 5,538. And in Frankfurt, the DAX-30 was 29 points lower, at 7,777, as automotive stocks dragged the index down.
Across the Atlantic, postive remarks from Goldman Sachs boss Lloyd Blankfein sparked a rally in the financial sector. The Dow Jones registered its biggest one-day gain in eight weeks, adding 319 points to end the day at 13,307. The tech-rich Nasdaq closed 89 points higher, at 2,673. And the S&P 500 was 41 points higher, at 1,481.
Asian stocks tracked Wall Street higher today. The Japanese Nikkei had risen 372 points to 15,499, and the Hong Kong Hang Seng was up 1,362 to 29,166.
Having fallen by over 43 on Nymex yesterday, crude oil futures had edged up 56c to $91.73 today. In London, Brent spot was at $89.43.
Spot gold dipped to a low of $799.70 today but rebounded to as high as $806.40 on the higher oil price and bargain-hunting. Silver, meanwhile, had risen to $14.82.
In the currency markets, the pound rose as high as 2.0777 against the dolllar before falling back to 2.0764 and was up to 1.4168 against the euro as investors moved back into carry trades. The dollar was at 0.6821 against the euro and 111.31 against the Japanese yen.
And in London this morning, HSBC - Europe's biggest bank - announced that it is to set aside $3.4bn in the third quarter to guard against an anticipated rise in defaults amongst US borrowers. CEO Michael Geoghegan also said that it may be two to three years before the bank's subprime problems are resolved.
Finally, our recommended articles for today...
The real reason women are paid less than men
- Figures out last week showed that women still aren't getting paid as much as men. The gap now stands at 17.2%, and a shocking 27% at senior management level. So why do women put up with this? asks Merryn Somerset Webb. For more on the realities of the modern workplace, click here: The real reason women are paid less than men
Warnings of what lies ahead
- It's not rising interest rates, the roars of professional bears, or gloomy economic predictions that are the real harbingers of stockmarket downturns. It's the faltering optimism of the businessmen and women at the sharp end. For more on the once-hyped stocks that are now struggling, read: Warnings of what lies ahead
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