Time to Change Focus? - 6/11/2010

The above chart dovetails with some of the themes I described in my Year Report which could be played out in the coming months/years.

The above chart is a ratio chart of XGD/XXJ (Gold Miners to Financials ex Property).

Gold Miners were the place to be in 2010 with an increase of close to 40%.

The ratio chart shows that this ratio has hit resistance, broken below the uptrend line and now could be headed down.

This suggests at least a switch out of the Gold Miners and into Financials (on a relative basis). On a wider scale it suggests generally a shift out of commodities into other more attractive options at this time.

That goes along with a theme described in the Year Report. Old Economy stock markets (e.g., Japan, U.S., Germany) out performed China in 2010.

What's going on?

The Gold Miners (and thus other commodity stocks, e.g., BHP, Rio) have been driven by devaluation of the American dollar which, paradoxically, has resulted in commodities rising in price (asset price inflation). Because commodities are priced in U.S. dollars, as the U.S. Dollar has fallen, commodity prices have risen. (That's also given rise to some extremists claiming that hyperinflation is about to descend upon us. So, stock up on gold, commodities, lots of tinned food, and head for the hills, buy a shot-gun, hide in a bunker, and settle down for the long haul.)

The chart above suggests, however, that the devaluation paradigm may now be coming to an end. If it is, then we can expect commodity prices to drop, e.g., gold, oil, copper.

And we can expect to see more switching out of the materials sector and into the financial sector. And out of China and India and into old economies where knowledge based industries are dominant (as opposed to China and India where cheap manufacturing, services and infrastructure building are dominant).

It's early days yet - but the pieces of the jig-saw puzzle seem to me to be fitting together.

My Year Report indicated that Australia is now based on complex multi-lateral trade patterns. The shift in pricing for commodities may not be such a death blow as it might have been once. It is not, however, a positive for us - and it will depend on how swiftly Australian business can adjust to this new paradigm just how the Australian economy and stock market will suffer (or not). But one thing appears certain to me, I'll be looking carefully at sectors to invest in - and I won't necessarily expect the materials sector (including Gold) to be the dominant sector going forward.

Cheers
Red