Gold, Silver, Oil, and Stocks - Spring 2008

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Please see our video related to this entry: Gold, Silver and Oil - March 2008
http://www.youtube.com/watch?v=wVpcdxh1Jv8


Gold and silver both had price lows in mid-August of 2007, with gold around $640 an ounce and silver just under $11. Both started a long rally just as the U.S. Federal Reserve began it's rate lowering campaign by dropping the discount rate on August 17th. Rallies in gold and silver indicate that the Fed has set interest rates too low and its interest rate policy is inflationary. Gold and silver both did indeed rally during almost the entire period when the Fed lowered rates sending a clear message about the inflationary implications of the Fed's actions (clear to almost everyone but the Fed that is).

Since the Fed was in a race against time to prevent a recession in a presidential election year and it takes about six months for a Fed rate cut to have full impact on the economy, it was quite predictable that the Fed would be finished lowering rates by March 2008 (only one additional quarter point drop took place after that) and the gold and silver rally might end (temporarily) around that time.

Gold and silver both peaked at the time of the Fed's March meeting and began selling off immediately thereafter. Gold had psychological resistance at $1000 an ounce (a nice round number that many traders were looking for it to reach and where they planned to sell once it did). It hoovered around this level for several days and actually reached 1033 in overnight trading before the selling began. Silver, like gold, was technically overbought and even more overextended on the charts making it even more vulnerable to a sell off. Both gold and silver dropped sharply. Within only 3 days, silver lost 20% of its value.

Oil (Nymex light-sweet crude) followed a different pattern from the precious metals. It had psychological resistance at 100 and got stuck around this level in November and December of 2007. It finally broke through the 100 level in February 2008 and rallied into July until it got just over $147. While oil was rallying, gold and silver sold down in a choppy fashion until they
hit a price low in the beginning of May.

The notes for our talks on this subject can be found at: http://investing.meetup.com/21/files
1. Gold, Oil, Silver, and Stocks - March 2008
2. Gold, Silver, and Oil - April 2008

NEXT: The Inflation Versus Deflation Argument - Part I

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21