Gold and Silver Recover After Big Drop in Asia

 

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.

While Americans slept, gold and silver prices plummeted in Asia. The low took place in Hong Kong  at approximately 3AM New York time when spot gold flirted with the $1540 level and silver was around $26. A strong rally then took place after the London market opened half an hour later.

By the time Monday New York trading began at 8AM, spot gold was selling for $1626 and spot silver at $28.50 an ounce. So the average American investor wasn't able to buy into the carnage. The low prices set in Asia will almost certainly be tested in the future however and there is a good chance that  will take place during U.S. trading hours. As of now though, the $30 support level for silver is history.

In the last three days, gold has experienced it biggest drop since the 2008 Credit Crisis. Silver has had it largest decline on record. There is significant technical damage, especially for silver. On the 24-hour charts, silver has decisively broken its 325-day/65-week simple moving average -- a key line in the sand separating bullish and bearish trading behavior. This level is in the low 1400s for gold. Silver's behavior is telegraphing that gold will almost certainly hit that level. If silver can't hold the 26 level in the future, the next stop for it will be in the 21/22 range.

What is causing the big drop in precious metals? Well, both silver and gold were extremely overbought at their highs. When this happens, a lot of traders were buying heavily on margin. This creates a situation where many of them will be forced to sell at the same time if any bad news takes place. Once the selling starts, the market cascades downward. We are seeing that with gold and silver right now. Such behavior is common in any strong rally and does not by itself indicate a bubble (that would require at least a 500% to 1000% yearly price rise for the precious metals).

While a rising U.S. dollar during September and new margin requirements from the CME last Friday have led to precious metals selling, the big problem is in Europe. The Greek debt and EU bank crisis is causing a liquidity crunch for the big trading houses and they are selling whatever they can to raise cash.  The inadvertent result is that investors are being given the opportunity to pick up precious metals at bargain prices. A little patience might be advisable before hitting the buy button however.


Disclosure: None


Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Is the Gold Rally Getting Frothy?

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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At the end of Globex trading in New York, spot gold was $1197.00 on Monday, December 1st. Gold then hit another record high during the evening in Hong Kong, with spot reaching $1217.23 an ounce. New highs were also reached in British pounds - 733.02, euros - 805.71, and in Swiss Francs - 1214.44. While U.S. investors are getting more bang for their buck, the gold rally is global and an indication of a broad-based lack of confidence in fiat currencies. This is a long-term trend and will be lasting well into the next decade, if not beyond. That doesn't mean gold will be going straight up however, there will be sharp reversals and investors need to watch out for them.

A major impetus for the current rally was Barrick Gold eliminating its fixed-price hedge book. Barrick wasn't making money on the continual rise in gold prices because of its hedging activities. Shareholders forced management to close them out. Barrick had to buy back the hedge contracts and this was originally expected to take somewhat into 2010 before this was finished. Apparently, Barrick closed out all the hedges by the end of November. This will cost Barrick $6.0 billion in charges against earnings. Gold has been rallying since 2001 and one wonders why it took Barrick management 8 years to react to this. Investors who think management and industry 'experts' always know their market best, might want to reconsider this notion. These are the people who frequently are the last to catch on to what is going on.

The end of an event that has been propelling a market should be paid attention to by investors. It can mark a temporary pause in an uptrend. Gold is already overbought on the daily and weekly charts, so it is vulnerable to some selling. The momentum however is extremely powerful and the current overbought state can last for awhile longer before selling comes in. The selling will only be temporary however. The peak of this rally is still at least a few months off.

Barrick gold closing out its hedges is only one of many factors pushing up the gold market. The declining U.S. dollar is a far more important. The trade-weighted dollar has been as low as 74.23 and has a band of support in the 72 to 74 level. A test of the March 2008 lows (the same month when gold first broke $1000 an ounce) below that band is almost certain. The euro testing the 1.60 level should be taking place around the same time. Lower lows for the dollar and a higher high for the euro should not be ruled out next spring. The longer term trends are pointing in that direction - and those are the trends that should be watched most closely.

Disclosure: Long gold.

NEXT: Our Current Economic Illusions

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.

Dollar Breaks Down; NovaGold Breaks Out

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 Blog:

The U.S. dollar had a serious technical breakdown last night. The trade-weighted dollar traded as low as 75.44 in the pre-market this morning, well below important support at 76.00. Almost every currency on earth is rising against the greenback in a global orgy of dollar dumping. Behind the scenes buying efforts of central banks to prop up the U.S. currency have failed so far. They have yet to bring out the big guns, although they have little ammunition to put in them if they do. Even under the best of circumstances holding up a collapsing currency is like trying to stop a tsunami.

Gold and silver have become the collateral damage of the central bank efforts, but this is only evident in U.S. trading. Gold hit another record high last night in Hong Kong, selling for over $1070 at one point. It traded in the mid $1050s in early New York trading. Silver hit $18.09 in Hong Kong, another yearly high, but was $17.71 shortly after U.S markets opened. You can expect the battle for gold and silver pricing will eventually be won in Asia.

The best performing mining stock in North America yesterday was NovaGold (NG). This has been the favorite mining stock of the New York Investing meetup for a few months now and members have been encouraged to accumulate it at $4 and under this summer. Nova closed at $6.02, a new yearly high, yesterday and broke out of the handle of a cup and handle formation. While earnings were released yesterday, current income is not the relevant factor in NovaGold's stock price. It owns probably the biggest untapped gold deposit in the world. This asset only becomes more valuable as the price of gold goes up. The bears have been trashing Nova all the way from its recent low around $3.30 to the current $6.00 price telling everyone to sell the stock. Expect them to come out of the woodwork now that the breakout has taken place and they are really getting killed in their short positions.

The falling dollar is helping to prop up other commodities (all of which are priced in U.S.dollars). Light sweet crude oil almost hit $74 this morning and looks like it might finally reach an important Fibonacci retracement around $77. Seasonal weakness is likely to restrain oil prices this fall and early winter however. There may be more follow through today in the big rally in grains that started Monday (GRU is the ETF for this investment). There should be a pull back within the next couple of weeks or so that provides another entry point however. Long term bonds were also selling off this morning and interest rates rising. Double short ETF TBT, which rallied strongly off a bottom last Thursday and Friday should be watched. Holding a country's paper assets when its currency is declining is never a good idea.

NEXT: The Dollar, the Fed, Housing and the Economy

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.

Pandemic of Government Stupidity Over Swine Flu Sweeps Globe

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 Blog:

The biggest thing to fear from the current swine flu outbreak is the stupid reactions of government officials. While we would like to think that we live in a world where intelligent scientific thought dominates and ignorance and irrational emotional reactions are not the basis for important decisions, the reaction to swine flu indicates otherwise. The global medical establishment, highly trained scientists, have reacted more like voodoo shamans instead of engaging in rational analysis. The mainstream press, instead of acting as a responsible gatekeeper, has had a field day spreading panic. Government officials have followed up by doing some of dumbest things imaginable (in case you don't understand what is going on with how they are dealing with the Credit Crisis -think about how well that's probably being handled).

One of the most outrageous government acts so far has taken place in Hong Kong where authorities have sealed the downtown Metropark Hotel, where a sickened Mexican tourist had stayed, trapping 350 business travelers, tourists and employees inside. Riots have broken out in Egypt when police have tried to fulfill the government's mandate to kill all of the country's pig population - there is no evidence that any of pigs have swine flu there. In Baghdad, the Boars in the zoo were slaughtered even though there is no swine flu in Iraq. The U.S. has closed down hundreds of schools. In Mexico, the capital is totally closed down and will remain so for a few more days. Officials from the CDC, the federal Health and Human Services Department and the New York City Health Department have made irresponsible statements that have helped engender panic. The first two warned of an increasing death toll from swine flu and the latter that there were already hundreds of cases in New York City last week - none of which has turned out to be true.

The source of all the worry about swine flu is and always has been suspect. There have been two competing strains of information that have led to contradictory conclusions. Authorities throughout the world have chosen to believe the unreliable information source over the reliable one. The first strain of information are reports and statistics on swine flu from Mexico - a country with a chaotic health care system and questionable data gathering ability. The second data source is from the developed world, where health statistics are reliable. Based on initial reports out of Mexico, swine flu was a deadly virus. However, even as of today, there have been no fatalities elsewhere - and that's hard reliable data. When you are exposed to contradictory information from two sources with widely varying credibility, which do you believe? In the case of swine flu, it as if the medical authorities chose to believe Star Magazine over the New York Times.

Moreover, it has since been demonstrated that the initial reports on swine flu from Mexico were pure speculation and are not supported by the facts. Over a week ago, there were already supposed to have been 160 deaths there from swine flu in Mexico. The current count has risen to 19. What? Tests for swine flu were not being done initially and now that they have been only 19 people so far who have tested positive for swine flu have died. Whether or not they died from swine flu is not proven and should be questioned considering that no one outside of Mexico dies of swine flu. These 19 could have died from any number of other illnesses and considering there was an epidemic of virulent pneumonia in Mexico, this would be a strong candidate for the actual cause of death. How are the Mexicans handling this rather embarrassing situation? Just today, in a news release, Mexico's Health Secretary said "11 people were suspected to have died from the virus in the previous 24 hours". Huh? While the glaring headline seems to indicate swine flu deaths are increasing, what was meant was that testing has shown the number of supposed deaths from swine flu jumped from 9 to 20 (including the Mexican toddler that died in Texas). Note to Mexico's Health Secretary, 20 is a much smaller number than 160.

U.S. medical authorities are already backtracking and making the case that their highly irresponsible actions were justified. In appearances on the Sunday talk show circuit, it was stated that a vaccine for swine flu is being prepared and after it was created it would then be decided whether or not to order large amounts of it be produced in the fall. Despite their hemming and hawing, it was quite obvious they realized they had screwed up big time. Don't expect an admission of this and don't expect any one of these bozos to be fired. After all, why should the health of the American people be in the hands of competent people.

NEXT: Banks Get Swine Flu; William Cohan at New York Investing

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.

Buy When There's Flu in the Streets

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 Blog:

Reports of a possible flu pandemic are permeating media coverage today. This news caused a significant sell off in the Taiwan and Hong Kong markets last night where memories of SARS are fresh on everyone's minds. While I have frequently criticized the media for their irresponsible coverage of the stock and commodity markets, coverage of medical issues seem to be even more problematic. As usual, instead of a responsible recitation of the facts with the logical conclusions that can be drawn from them, media reports are geared toward sensationalism meant to panic the public (when you really should panic, silence or boosterism from the mainstream media is much more likely).

The first thing that needs to be considered is that a major influenza epidemic in the summer is highly unlikely, if not impossible. Recent studies indicate that flu is most contagious under dry conditions at 20 degrees Fahrenheit (minus 6 Celsius). This is why flu epidemics take place in the winter and not the summer. In the case of the 1918 pandemic, flu broke out early in season in September and October. This took place at the end of World War I when there were large concentrations of military personal confined in close quarters (ideal for spreading disease). Examining a map of the disease's spread in the U.S. flu seems to have started in port cities and around military bases. There was a small initial outbreak of flu in the spring of that year which the authorities ignored. The disease then became dormant in the summer as should have been the case. Since we are already at the end of April, weather conditions favorable to flu are quickly dissipating. This gives the authorities plenty of time to react (it is already known that antivirals are effected in combating this new incarnation of the flu and the U.S. has large amounts of these in storage). None of the small number of cases identified in the U.S. so far have been fatal and all but one person with the flu travelled to Mexico (the exception was the wife of someone who travelled to Mexico).

How does this affect your investments. It depends on when you think the news will become better. It took quite awhile before the news coverage on SARS indicated the problem had passed. In this case, the news is likely to shift to a more positive tone or disappear in a relatively short time. The market sell offs that take place during medical panic should be bought into just like those that take place because of market panics. There was already likely to have been some selling this week as is. So if this blows over quickly, look to Friday as a possible good rally day.

The important take away is that markets will sell off because of panic inflamed by the mainstream media. Often, as in this case with this new version of the flu, the media blows everything out of proportion because hype sells papers and gets big viewing audiences. Unfortunately, it can loose you money if you sell into the panic instead of buying into it. Buying high quality goods at fire sale prices is always a good way to make money and this should never be forgotten by any investor.

NEXT: Markets Catch Swine Flu

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.

The Stock Market's Early Returns

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 Blog:

While the election doesn't appear to have resulted in the worse possible outcome for Wall Street, what did occur was interpreted by the market negatively enough to cause a small crash today. So far Obama has won the presidency by a 7% plurality, although based on turnout estimates several million votes seem to be missing from the tally. The Democrats have picked up at least five seats in the Senate and have solidified control, but the filibuster proof majority remains elusive for them. Four seats - Georgia, Minnesota, Oregon, and Alaska - are still undecided however. Currently the Republican is ahead by 500 votes or less in Minnesota and Alaska and recounts will be taking place. All the ballots haven't yet been counted in Oregon's mail-in-only election, but it looks like the Democrat will win when they are. As of now, Georgia is heading toward a run-off election next month because neither candidate got 50% of the vote. Alaska would have to have another election as well if convicted felon Stephens wins, since he will probably be expelled from the senate by early next year at the latest. Current tallies indicate that the Democrats picked up around 20 seats in the House and will have between an 81 an 88 vote majority.

Inexplicably the market rallied while the voting was taking place, with the Dow closing up 305 points or 3.3%. This was the biggest rally since 1980 when the market was first opened on election day. The previous biggest rally was a 1.2% gain in 1984 when Reagan defeated Mondale in a massive landslide that was universally predicted. Today, after seeing the returns all the major U.S. stock indices dropped 5% to 6%. Previously this would have been a headline news, but a drop of this magnitude has become commonplace in the last two months of high volatility trading.

Volatile markets are of course not healthy markets. A 305 point Dow rally yesterday, followed by a 487 point or 5.1% drop today should not inspire confidence. The S&P and Nasdaq were down a slightly greater percentage and the Russell was down the most with a 5.7% drop. Oil dropped $5.23 a barrel after an even bigger rally on election day. When Japan opened, the Nikkei followed the U.S. markets down, ending its morning session with a drop of 5.7%. The Hang Seng in Hong Kong was having an even bigger drop, while the Shanghai Composite hit a two-year low before attempting a recovery. Like the Nikkei, Korea and Taiwan were experiencing crash level drops at mid-day while Singapore and Australia were down somewhat less than 5%. If anything, volatility in Asian markets has been even greater than in the U.S.

In the longer term, there is a lot more to consider than the 5% to 6% drop in the U.S. markets today. Since September 2007, the New York Investing meetup has pointed out how the Federal Reserve and the Treasury have attempted to prevent and cover up economic problem before the presidential election. Well, the election is now over. Some of these actions may now start to unravel. If so, we shall begin to see this in the next month or two.

NEXT: When Stimulus Ceases to Be Stimulating

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.

China's Olympic Sized Bubble

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.

The credit bubble in the U.S. did not exist in isolation, but was inextricably linked to a bubble in China U.S. trade. One of the many manifestations of this bubble was a Chinese stock market that started going straight up in late 2006, reaching extreme valuation levels based on any historical standard. The New York Investing meetup discussed this issue in its October 2007 meeting in a presentation entitled, "Thinking Outside the Bucks" (please see: http://investing.meetup.com/21/files).

In the 1990s and early 2000s, China was the most significant economic success story in the world. Rapid industrialization and trade grew the Chinese economy and kept consumer prices down in the West. This was accomplished by utilizing China's large pool of inexpensive labor to produce an increasingly greater number of goods for export. Since labor is the largest cost component for almost all manufactured goods, this lowered prices globally for a number of items. However, China went one step further to insure it could continue to sell its exports at low prices - it pegged its currency to the U.S. dollar (an idea originally suggested by the American monetary authorities, much to the later regret of U.S. politicians). The dollar peg allowed China to keep its currency undervalued, just as Japan had done during its decades of spectacular growth, and provided its exports with a huge advantage in world markets. It also insured the creation of a massive bubble.

As Chinese exports to the U.S. increased, China accumulated a growing hoard of dollars that it used to purchase U.S. treasury bonds. This in turn kept interest rates low in the U.S. and allowed Americans to borrow ever greater sums to finance a purchasing-based consumer economy and for the U.S. government to borrow cheaply to finance a ballooning national debt.
Pegged currencies are not without their downsides, however, as China eventually found out when its internal rate of inflation began rising. In July of 2005, China officially, but not actually depegged the Yuan from the U.S. dollar. The Yuan was allowed to float in such a narrow trading band that by September 2007 it had fallen only to 7.50 from 8.28 to the dollar. Since the Yuan wasn't allowed to float to a realistic level, inflation started taking off in the mainland and the Chinese government announced price controls that month to try to halt it.

Meanwhile, the greater wealth created within the Chinese economy led to an exploding stock market. This bubble in stocks was further fueled by asset controls that prevented most Chinese investors from moving their money outside of China. The effects of this could be seen by examining prices of Chinese stocks that traded in both the mainland and Hong Kong. The prices on the mainland exchanges were much higher than those in Hong Kong. In August of 2007, the Chinese government announced a policy shift that would allow mainland investors to buy and sell stocks in Hong Kong. The effect of stock prices in Hong Kong was explosive and only days later the Chinese government announced this policy change would be on hold for the foreseeable future.

For more on this topic, please see the video: "Global Perspectives on the Decline and Fall of the U.S. Dollar" at: http://www.youtube.com/watch?v=dbHxbOvjYis&NR=1

Next: All that Glitters Isn't Gold, It's Also Silver

Daryl Montgomery
Organizer, New York Investing meetup

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