Thursday, February 19, 2009

Gold and Silver Rise, Oil falls

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.

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Gold and silver continued their climb yesterday, while oil scraped along the bottom. The prices of all three are affected by the value of the U.S. dollar and inflation. As we covered in this blog yesterday gold demand hit a record in 2008. You can assume it will hit another record in 2009. Investment buying is the main driver, with the GLD ETF increasing its holdings 200 tons in the last month alone. Demand for oil on the other hand is falling, but not by nearly as much as the press would have you believe. The supply is likely to be falling much faster sometime in the next several months. Oil is a major bargain now, just as gold and silver were last October and November.

Gold closed at 978 in the futures market yesterday and reached 986 in London trading this morning. It should soon reach its all time high just above $1000 an ounce. Expect some selling in that area, but assume it will only be temporary. The current rise in gold is taking place because of a loss in confidence in the global financial system. This is not something that can be fixed over night, it will take many years. Gold and silver will be good investments during that period as people lose faith in paper currency and see that it is continually losing its value. Once gold breaks decisively above 1000, it should move to 1200 in a very short time. The next stop after that should be around 1500. Global governments are likely to try to dampen enthusiasm at that point by announcing an IMF gold sale or engaging in some other manipulation (a chronic problem in the gold market).

Silver always follows gold and is still far from its previous high around 21. Silver closed at 14.29 in the futures market yesterday. It's recent rally has been powerful just like gold's. Silver broke through major resistance in the mid 13's like a knife slicing through hot butter. The next stop is around 16, where the resistance is even more formidable. Expect some problems in that area. Above that there is minor resistance around 19 and then the important old high of 21. Unlike gold, silver has not made a new all time high yet. The old high from 1980 is in the 50s. It will get there eventually.

While gold and silver are operating on all cylinders, oil is languishing in the mid 30s. Light sweet crude (there are many grades of oil) may have doubled bottomed at 33+, only time will tell. Fundamentally, oil is cheap especially since it is priced in U.S. dollars, which are incredibly overvalued. The alleged oversupply of oil doesn't stand up to scrutiny either. While the supply has been building up in the U.S., the price of gasoline has been rising steadily. If there is so much oil supply why isn't it used to produce gasoline, which is obviously in short supply if the price is rising? Either there is no oversupply of oil in the U.S. or some form of manipulation is going on. You can decide for yourself.

NEXT: Oil Yes, Financials No

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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