As we begin the new year of 2002, there are four markets on the verge of major trend changes: gold, silver, the British pound, and the 10 year Treasury notes. All four changes are directly related to the Federal Reserve's decisions to cut interest rates eleven times last year. Please understand, I'm not complaining, just observing. There was probably little else that the Fed could have done given the events of last year. For investors, these shifts are worth noting.
The past ten years have been the poorest decade that the gold and silver industries have had in ages. Recently, central bankers around the world have been dumping their metals, sensing that inflation is no longer a threat, and pushed prices to historical lows. Producers adapted by cutting production (gold, silver, and copper) and started a trend of consolidating into fewer, larger mining companies. These changes, along with the Federal Reserve's eleven interest rate cuts are giving the metals new potential for higher prices. Technically, June gold above $280 and July silver above $4.65 would signal significant improvements in the long-term trend.
The British pound has been in a downtrend for three years while the U.S. dollar has been king, but the events of 2001 have shifted the tide of growth to the U.K. The U.K. is estimated to have grown 2.5% last year, the best of the G-7 nations, and the same is expected for this year. Technically, the March pound has a chance to go higher if it can hold above $1.45.
The March 10 year T-notes have been in a strong uptrend for the past two years, having benefitted from the weakened U.S. economy. First, the crash of the technology sector along with declining corporate profits pushed investors into the Treasuries. Then, the events of September 11th dealt a serious blow to the economic outlook, giving T-note prices another boost. Now however, after eleven interest rate cuts, investors are starting to anticipate a recovery and the Fed is not likely to be concerned if a little inflation shows up. The Fed's current mission is to get this economy rolling again and that is not a good scenario for T-notes. Technically, a close in March T-notes below 103.50 would be significantly bearish.
In the big picture, higher metals prices, a weaker U.S. dollar, and falling Treasury note prices could be the start of higher commodity prices in general. 1986, 1992, 1998, and 2001 were all terrible years for commodity prices. The following years, however, proved to be highly profitable. Will 2002 be the same? As always, there are no guarantees. Have a Happy New Year!
