I have been saying about imminent correction in virtually every market except Dollar and China. I generally, used to be early in predicting turning points so that my investors get enough time to come out of the market.
As I pen this article most of the world markets are 8% to 12% down from the day( 4th Feb,2011) I predicted downside.
Believe me this is just beginning, situation like Gulf crisis leading to Oil crisis, tsunami followed by earthquake in Japan, European Central bank is mulling to raise interest rates, Emerging economies facing higher to hyper inflation, Sovereign crisis still lurking on European nations create perfect storm very difficult to weather by market.
Broad based correction is to continue to follow in next 6 months correcting markets by 20% to 30%. I do not rule out even 40% correction in some selected markets.
I wish, my investors heeded advise and encashed the profit off the table.
Why I am still short term bearish on Markets?
There are multiple reason for that. But let me be clear that I am not bearish on Precious metals in long term nor bullish on dollar.
I am talking here about short to medium term cycles which last typically 3-6 months.
Let me take one by one
Gold has tried no. of times to breach $1435 level, in fact did close above it for a day but next day was the Friday and on weekly closing day, Gold slide below $1435 level, all time high level. Again confirming that Gold is no mood to go up to make new highs, not even if Gulf crisis escalate and sends crude to $115.
Fundamental points also suggest that Gold started rally because of two chief reasons 1. Sovereign debt crisis, which shackled investor’s confidence in paper currency and investors found solace in yellow metal. 2. Reckless currency printing by central banks of the world which in turn will diminish the value of currency. So, to preserve the purchasing power investors flocked to Gold.
Now, neither of above two reasons are governing crisis in gulf. It is altogether different crisis. It is for democracy and equal rights. Currency is nowhere in the picture and hence resultant nil effect on Gold price.
Attached chart shows multiple failed efforts of Gold to cross the level of $1435.
IF Gold closes significantly above $1454, that would negate short term bearish trend.
Silver rallied beyond levels. But, one must note that Silver is high beta version of Gold and recent rally of Silver was not accompanied by Gold.
I expect Silver to correct along with Gold from current level around $36 level to close to $23 level. Yes, that is significant correction.
Expect deep cuts in commodity prices. Some commodities may correct even 35% to 40%.
Yes, there were supply issues to some extent. But, I firmly believe that commodity prices were largely driven by dollar devaluation and dollar printing rather than supply woes.
After, 2008 crisis almost all nations were in damage control mode and did everything they could do to contain the damage. Chief measures among them were fiscal spending ( Govt declared huge packages to sustain the consumption level of the economy and thus sustaining GDP growth), slashing interest rates to the lowest possible levels.
Because of this fresh cash flooding the world markets, across the world currencies went down and prices of commodities soared.
But situation has changed now.
Since last one year, emerging economies have been facing hyper inflation and thus they are raising interest rates, normalising the policy they adopted in 2008-09 to stem the price fall.
Many Governments who spent way beyond are now starting to control the fiscal deficit since it had reached to alarming levels during crisis time.
E.g. In Budget 2011, Finance Minister of India, promised to control the fiscal deficit to 4.6% from around 6% of the GDP.
So, these are the exact opposite measures to those taken in 2008-09 to tackle the crisis.
Therefore, cost of capital will go up now, as interest rates go up and Govt spending will reduce to more reasonable level thus reducing liquidity in the system. Both these factors will lead to lower commodity and metal prices locally and Globally.
I am bearish on $ in long term. But, in short term dollar needs respite. It is a pause for short to medium term before large decline resumes again.
I expect $ to take a pause and go up some 10% to 15% , causing massive upheaval in dollar denominated markets.
Real Estate (India) crash
Refer my earlier article to have detailed understanding https://investmentacademy.wordpress.com/2011/01/13/inflation-interest-rates-and-real-estate-crash/
I have no doubt that Real Estate is done and due for significant price correction. I continue to expect 40% price correction in real estate by end of 2012.
Indian Equity Market
I had written in my earlier article that Sensex could correct up to 16000 level. I continue to expect the said to be touched in next 2 months time.