For Gold, Overbought Means Overgood

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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Gold hit another record high this morning. After closing at $1151.90 (up $6.30) at 5:15PM in New York on Friday, spot gold began rallying in Hong Kong and Sydney trading Sunday night. Shortly after trading began Monday in New York, gold reached $1171.60. Spot silver traded as high as $18.93, above its highest price last week. This is the seventh day in a row that gold has traded higher. Gold rose last Friday, even though the U.S. dollar was rallying.

COMEX December futures expire next Monday, November 30th. There is a lot of talk about the $1200 price point acting as a magnet at the expiration. It may indeed happen, but the ETF GLD has become overbought on the daily charts as of today after gapping up strongly (the price will have to trade down into the blank area of that gap at some point). GLD will hit overbought levels this week on the weekly charts as well. Some give back in price is going to be necessary soon. It may wait until after the first few trading days of December however. SLV stayed overbought on the daily charts and continued rallying for two weeks this September before there was any significant price decline.

GLD itself became overbought on the daily charts and rallied for two weeks also in September of 2007. This was at the beginning of the gold rally that lasted until March 2008. That rally had a midway pause (referred to as a high tight flag by technicians) approximately 7 weeks after GLD first became overbought on the dailies. However, the midway peak began about 1 week after gold became overbought on the weekly charts (four months before the rally ended). Since the overbought conditions are taking place coincidentally this time, we can get the midway pause for the rally starting anywhere from early December to the second week in January. Once this takes place, you can double the amount of rally from $1033 that has preceded it to get an approximation of the coming peak in spring 2010.

The silver ETF SLV has different technical patterns that does GLD. On the weekly charts, SLV isn't even remotely overbought and if silver kept on going straight up it would take approximately two more months before this could happen. A pause with some retracement and it could be another four or five months. A strong overbought condition on the weekly charts was the end of the SLV rally in March 2008. As for the daily charts SLV was overbought in February, late June and September of this year. Each overbought condition caused a temporary peak and SLV then traded higher later on. SLV still has a way to go before being overbought again on the daily charts. Look for this to happen. It will likely mark the beginning of the mid-rally pause for both silver and gold.

Disclosure: Long gold and silver

NEXT: When the Invisible Hand is the Government

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.

Economic Predictions for 2009

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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Last night in its December 4th meeting, the New York Investing meetup released its economic predictions for 2009. The talk began with a review of the 2008 predictions made at the Dec 12, 2007 meeting and published on the website that day (can be found in the file section in the file, "Japan 1992, U.S. 2007", see: http://investing.meetup.com/21/files). All the predictions made for 2008 were accurate at least to some degree, with the prediction of recession and and government bailouts for financial institutions being particularly spot on. If the 2009 predictions are equally accurate, it's going to be a very rough year.

It is our belief that the economy next year will descend from recession to depression (this is no official declaration for depressions as there is for recessions). As part of that scenario, unemployment is likely to rise toward and possibly into the double digits (depends on how much the government fudges the figures). Bankruptcies will increase dramatically, particularly for retailers, auto related companies (suppliers, dealers, etc.), home builders, and small businesses and individuals. Shrinking consumer credit and rising defaults on credits cards will continue to damage the economy. The real estate sector will not recover and the commercial component will suffer more than the residential. The bailout for banks and brokers will continue and additional money will be have to pumped into the failing institutions that have already received government money. Bailouts are likely to be needed for big players, like Morgan Stanley, Goldman Sachs, Bank America, and General Electric. Failures of small and medium banks will rise.

The U.S. government will react to this economic deterioration in 2009 by lowering interest rates even further, essentially instituting ZIRP (zero interest rate policy), and by ballooning the deficit and the national debt. Bailouts will expand beyond companies to states and municipalities. Some municipal bonds are likely to default if not propped up as well. The feds are going to have to support money market funds again next year, just as they have done twice so far in 2008. They may have to bail out the market system itself with the possibility of an exchange failing (there have been rumors of trouble at COMEX for some time now). In general, there will be some shift toward bailouts being focused on programs that help individuals rather than corporations, which received over 95% of bailout money in 2008.

Things don't look any better on the International front either. 2009 will be the year of global recession, with simultaneous recessions in the U.S., the Eurozone, Great Britain, Japan, Australia and a number of emerging economies. China will be in danger of political instability because of contraction in its manufacturing sector. Countries that export a lot to China, such as Japan and Korea and commodity producers such as Brazil will see damage to their own economics because of China's problems. In Europe, it looks like Great Britain will be the hardest hit of the major countries. Some smaller countries, such as the Ukraine, Hungary, Romania, Latvia and Estonia could see their economies implode just as happened in Iceland this fall. Overall, the rest of the world will react to the economic crisis by lowering interest rates and 'printing' large amounts of money just as we will be doing in the U.S.

While things look dire on a number of fronts, that doesn't mean there aren't many ways to make money in the current environment. People tend to focus too much on the risks in such scenarios, instead of the opportunities. The bigger the crisis, the bigger the opportunity should always be kept in mind. Winners always keep both in balance and keep an eye out for profitable investments when others are too worried or too fearful to do so.

The notes for the talk can be found at: http://investing.newyork.com/21/files in the file, "Economic Predictions for 2009".

NEXT: Brother, Can You Spare a Job?

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.