Tuesday, May 26, 2009

North Korea, OPEC and Precious Metals

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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The news putting the markets on edge this morning is that a nuclear test and missile firings took place in North Korea. A country that barely has electricity (check out a nighttime map of the world to see what I mean), is supposedly threatening the world's security. The only thing missing from the story was an allegation that North Korea loaded the missiles with mutated swine flu virus and aimed them toward Dick Cheney. Safe haven trading raised the value of the U.S. dollar, which was about to break below major support. Counter intuitively gold and silver had a sharp sell off on the news when they should have gone up. Light sweet crude fell below $60, but quickly jumped back above that level. OPEC is meeting on Thursday and this will dominate oil news for the next few days. Its membership is worried about reducing the supply of oil in storage.

While OPEC's stance should be bullish for the oil market going forward, you would never know it if you just read the mainstream media headlines. These are emphasizing 'OPEC unlikely to cut production quotas at May 28th meeting'. Since OPEC is more likely to increase production during the heavy oil use northern hemisphere driving season, this is not exactly either surprising or negative news. The Saudis, as well as other OPEC members, have furthermore stated quite clearly that their goal is to get global stockpiles of oil down from the current 61/62 days of forward cover to the average 52-54 days. Their current price target for oil is $75-$80 a barrel, the same as the New York Investing meetup's. Don't expect production increases or the possibility of further production cuts to be off the table before both goals are met.

In the near term, oil prices should also be supported by rebel action in Nigeria - a major source of oil for the U.S. News reports today are stating that rebels have sabotaged a major pipeline run by Chevron in the Niger delta and this has cut off 100,000 barrels a day of supply. The most amazing thing about this news, is that I first read about it on a wire service report nine days ago. I have been looking for it to appear in general news coverage ever since. You should ask yourself why major news that would raise the price of oil was buried by the U.S. media? If this was an isolated incident it could be written off as mere coincidence. However, as has been pointed out numerous times in this blog, oil coverage has been incredibly slanted toward the bearish viewpoint for months now with the use of misleading statistics and one-sided quotes from analysts who only hold negative views. The tenor of coverage looks like it has been changing in the last few days though.

Other than oil, you need to continue to pay attention to gold and silver. Spot silver, traded above its key resistance level of $14.50 at the end of last week getting to around the $14.80 level. While the spot price fell to $14.30 on the North Korean news, it was back up above $14.50 by 9:00 AM. A tug of war between the bulls and bears seems to be taken place currently at that price. Spot gold fell almost to $940, but shot back to $950 pretty quickly. Once gold breaks above about $965 level, it will be able to test $1000 and go on to new all time highs. The bears are really coming out of the woodwork in the last few days though to try to talk gold down -
a number of them have target prices for gold of $600 and major short positions on the metal. Soon they should be screaming as if they were hit by a North Korean missile.

NEXT: GM Sage Continues; Gold Becomes the New Oil

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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