Thursday, September 18, 2008

The Mega Move Up in Gold and Silver

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.

Our video related to this posting:

It looks likes gold and silver had their biggest one day move up in history, both in absolute and percentage terms, on Wednesday . The price run up looks even bigger than the one that took place the day the previous commodities bubble peaked in 1980. The underlying picture between then and now is quite different however. While the move in 1980 indicated the end of a major rally, the move yesterday indicates the beginning of a new one.

In 1979 and into the beginning of 1980, gold and silver prices were going straight up in what is termed a blow off top. A huge move up, similar to what took place yesterday, ended the rally and the secular bull market that had been in place for the previous decade. What had preceded yesterday's rally was six months of selling for gold and silver, not buying. From high to low, gold was down 29% and silver 52%. Both had hit major areas of support - 738 for gold and 10 to 11 for silver. Gold then moved up 11.3% (or $90) and silver moved up 14.4% (or about $1.50) from the previous day. The gold miners index, the GDX was up 11.7%. These moves took place on high volume, more than triple the average for the GLD ETF and more than double for the SLV ETF, confirming the bullish picture.

The bullishness was furthermore limited to gold, silver and to a lesser extent oil (up 6.6%) and food commodities (up about 3%) . It was not part of an overall commodities rally, copper was actually down on the day, nor even a precious metals rally. Platinum was up 1.7% and palladium up only 0.5%. This rally was massive short-covering linked to increased inflation expectations and pessimism about the future of the U.S. dollar. The trade-weighted dollar fell 1.4% - a huge one-day move for a major currency. The hyper response of gold and silver to this drop indicates that much of the previous selling had been short selling and not traders dumping their positions as has been repeatedly reported in the media.

While panic buying was hitting the gold and silver market, panic selling was taking place in stocks. All of the major U.S. indices almost hit the mini-crash level of down 5%. Nasdaq came closest with a 4.9% drop on volume 50% greater than average. The Dow had a lesser drop at 4.1%, but it took place on double average volume. The S&P was down 4.7%. Since August 2007, whenever the U.S. stock market has started falling apart, the Fed has come in with some sort of major liquidity injection to prop it up. By last night one of the biggest liquidity injections ever, involving most of the world's major central banks, had been arranged. What a surprise!

NEXT: Central Bank Liquidity Tsunami Returns

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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