GOLD THOUGHTS: Gold investors thank HSBC, the global bank. $Gold had been making time, unwinding an over bought condition. Last week, HSBC announced its loan loss provision for 2006 will top $10 billion, 20% more than previously expected, because of mounting losses on U.S. mortgages. Markets recognized this as only first of blood letting to be done at financial institutions involved in U.S. Mortgage Mania. More financial blood will follow. Economic bottoms are not announced on CNBC or in research notes from Wall Street, but rather are marked by financial blood and failures. Is the Chairman of Wachovia updating his resume? Stocks of all mortgage related financial institutions should be sold. Proceeds should be moved to Gold on any price weakness.

This week the bad ideas started early. General Motors merging with Chrysler? How long will it take GM's management to convert Chrysler's stylish models into dull? Mergers of excitement too with satellite radio networks that no one listens to and makers of small rocks from large rocks. A start to a week right up there with rearranging deck chairs. With U.S. economy about to enter a recession, do these possible transactions really matter? Rather, focus on selling U.S. based financial institutions with exposure to the imploding mortgage and housing markets.

Street is now into forecasting weather, selling off oil. Somehow and someway this action is connected to the price of Gold. No one knows how, but that is the accepted thinking. Street is the only part of the globe that is bearish on Gold. Given that Gold's five year returns exceed that of most investment managers perhaps their attitude is reasonable. One would not want customers to discover they could do better in Gold, and not have to pay management fees. Note that Gold rose on Monday when NYC was closed. When NYC is open and global investors are absent, Gold sells down as was done on Tuesday. Many Asian investors are inactive most of this week as they celebrate the new year. But, they will be back. Which has more market power, the rest of the world or NYC? 

Gold market entered this week extremely over bought, thanks to Chairman Bernanke. Gold market apparently likes this Rumsfeldian chairman of the Federal Reserve. Tuesday's sell off should have been expected, and actually encouraged. These corrections build an over sold condition for traders and investors to use to their advantage. CN$Gold and ЄGold rapidly moving to over sold. EU and Canadian investors should use price weakness to add to positions. U.S. based investors can start buying later in the week.

Currency crises are generally created by what is referred to as currency mismatch. In the case of the Mexican peso crisis, financial assets were denominated in pesos and liabilities were denominated in dollars. Such a situation is obviously a currency mismatch. A massive currency mismatch situation has developed with the U.S. dollar. Foreign central banks own many hundreds of billions of dollar denominated assets financed by local currency debts, issued during sterilization operations. Funds own hundreds of billion of U.S. dollar denominated equities and bonds financed with yen carry trade loans. When this mismatch reaches critical stage, a financial Hiroshima will arrive for the dollar and U.S. equity markets. A $4 Euro? Yen at 38:$1? Gold at $1,400? How will your portfolio do?

© 2007 Ned W. Schmidt
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GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive a trial subscription send a note to Ned.

Please remember that no method is perfect nor is the one running the model.
All estimated returns are for the model portfolio and do not reflect those earned on actual portfolios.