The Technical Picture for 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. 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.

The world is awash in central bank money printing, with Japan this week joining the US and the EU central banks in announcing new stimulus efforts. As long as these programs continue, investors should be bullish on gold, silver and their miners and look to accumulate on any pullback (the same can be said for other inflation-related assets as well).

While there are a number of options for buying gold, silver, and their mining stocks it is best to analyze them using the GLD for gold, SLV for silver, and GDX and GDXJ for miners. All are ETFs with GDX representing a portfolio of senior miners and GDXJ junior miners (companies doing exploration and those in pre-production). More aggressive investors can buy leveraged products such as DGL and UGLD for gold, AGQ and USLV for silver and NUGT for miners.

Technically speaking, the charts for gold, silver and the miners are strong and getting stronger. The 50-day SMA (simple moving average) of GLD crossed the 200-day SMA on Thursday. This is considered a major buy signal among technicians and ironically it's known as the golden cross.  SLV hasn't made this cross yet, but it is a mathematical certainty that it will do so. This will most likely happen by the end of next week. The miners GDX and GDXJ are somewhat behind SLV and it looks like the cross might not take place until the beginning of October. As long as the 50-day moves above the 200-day and stays above it, the bull move is confirmed.

The DMI technical indicators however already gave buy signals for GLD, SLV, GDX and GDXJ in late August. The positioning of the indicator was bullish and the trend line moved up sharply. The RSI and MACD were also properly situated to support a bullish interpretation for all the daily charts. In the last few days, the trend line has gotten too high and has moved sideways or slightly down for GLD and SLV. It is still moving up for GDX and GDXJ.

While the DMI is indicating some pullback should be coming soon, the RSI offers even more support for this view. The RSI on SLV became overbought in late August and really overbought in early September. It reached the overbought point for GLD twice in September and recently for GDX. It is high, but not overbought for GDXJ. This pattern is bullish in the intermediate term and indicates a multi-month rally is likely, but it is bearish in the short-term. Too much buying has taken place too quickly and some pressure needs to be taken off. A drop down to the 50-day SMA would be healthy at this point.

There is also a very distinctive chart pattern for GLD and SLV that should be noted by investors. So far, GLD has made a textbook perfect cup and SLV has almost as good a match (GDX and GDXJ need to build the right side of the cup more). Ordinarily, this would be followed by a handle and then a breakout from the handle and the ensuing rally should last for some time (seasonally gold tends to peak around March). A drop of say 3%-7% soon would complete the textbook pattern. 

Investors have every reason to be bullish on the monetary metals and their miners. Both the fundamental backdrop (money printing from here to eternity) and the technical picture look good. This doesn't mean that they will be going straight up without occasional drops. Just use the drops to increase your positions. Of course, like all rallies, this one too will eventually come to an end. Until then, I will be tweeting daily updates with the charts attached from my twitter account which is @nyinvesting.


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

Why You Must Invest for Inflation From Now On

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.


The Fed made history today by announcing an open-ended money printing policy — a policy heretofore unseen outside of history's hyperinflation havens. The news conference that followed the announcement revealed a central bank acting out of extreme desperation.

While the Fed is doing another round of quantitative easing, QE3 is not the same as QE2. The previous QE involved the purchase of U.S. Treasuries. This time around, the Fed is buying MBSs (mortgage-backed securities). In QE1, various types of securities were bought. The previous QEs also had specific limits to the amount of money that was going to be printed whereas QE3 doesn't. QE3 is supposed to be ongoing until somewhat after the economy and employment situation have been improving for a while. How long that will be is anybody's guess.

Despite several questions in the press conference that followed the announcement, Bernanke made only vague statements about how the Fed would determine when enough money printing was enough. The purchase of mortgage-backed securities is likely to continue for some time because doing so is supposed to reduce unemployment. How that will work is not clear other than perhaps reducing unemployment in the construction industry. The Fed's actions should lower already historically low mortgage rates and Bernanke specifically stated more than once that getting the price of homes up was one of his major goals (he seems to have forgotten that the global financial collapse in 2008 was the result of the collapse of the housing bubble).

Anticipating the obvious objections, Bernanke tried to head off the major criticisms of the Fed's new plan at the beginning of his news conference. While he admitted that the Fed's action hurt savers and would make it difficult to prepare for retirement, he said that if you don't  have a job you wouldn't have any money to save anyway. So, apparently the large majority of people who have a job should risk having their retirement unfunded in order to pursue Bernanke's high risk policies that have been tried for the last five years, but haven't worked. I wouldn't have been surprised if a couple of retired people were brought up to the podium and Bernanke kicked them a few times to emphasize his point.

Bernanke also denied that the new round of money printing will cause inflation. The basis of his argument was that the members of the FOMC aren't prediction inflation in their projections, so obviously it's not going to happen (these are the same people that failed to foresee the subprime crisis coming). Also Bernanke claimed inflation has been around 2% for years, so there is no problem. Even a casual perusal of commodity prices since 2009 shows increases of 100%, 150%, 200% and sometimes more however. It is true the government isn't reporting inflation, but that isn't the same as it doesn't exist. The head of the Weimar German central bank also claimed inflation wasn't a problem as he printed more and more money. Eventually, inflation reached 300 million percent.

One of the real eye-openers of the Bernanke news conference was his admitting the impotency of the Fed and monetary policy. Over and over again Bernanke stated that the Fed's actions were, "not a panacea". He said that, "We [the Fed] can't solve the problems by ourselves". He also emphasized that the Fed's, "tools are not so powerful that they can solve the problem". If the chances of success are so limited, why is the Fed taking a course of action that could have serious negative consequences for the American people?

In addition to his desire to reinflate the housing bubble, Bernanke was also proud that when the Fed speaks, economic forecasters change their numbers and that, "markets respond to [the Fed's] guidance".  This was a blatant admission that the Fed purposely manipulates the stock and bond markets and financial news. Obviously, this destruction of free market mechanisms is not something that he considers shameful, even though this represents a major power grab on the part of the Fed.

Bernanke was much more coy however when the question of whether or not the Fed's money printing decision was base on political considerations. One reporter mentioned that Romney was not planning on reappointing Bernanke and asked if the policy shift was an attempt to help reelect President Obama. Bernanke denied this of course, his voice almost breaking when he stammered out, "our decisions are based entirely on the state of the economy." I must admit that I am personally surprised that the Fed did this before the election because this question is only going to be the beginning and the Fed has now made itself an ongoing issue in the presidential campaign. I didn't think Bernanke was so foolish to take this risk, but obviously I overestimated his political awareness.

Earlier this month, ECB head Mario Draghi promised unlimited bond buying. This is different from what the Fed is doing because those purchases are supposed to be sterilized (new liquidity put in is neutralized by liquidity being removed). Many people however believe that the ECB will have to engage in money printing despite its claims. Added to the Fed, this means inflation investments will have a bid under them for some time to come.  Investors should be looking at gold and silver, energy and agriculture. Ironically, shorting Treasury bonds also look like a good bet now as well, since the Fed is not buying them as part of its QE program (Operation Twist though will be going on to the end of 2012 however and this acts to lower interest rates around the 7 to 10-year maturity level so be careful). Keep buying as long as the Fed keeps printing.


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.

U.S. Employment in Long-Term Downtrend

 

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.

The August employment report released on September 7th was not particularly good by any measure. While the month to month changes seem lackluster, the longer term picture is truly dismal.

The headline numbers indicated that 96,000 jobs were created in August and that the unemployment rate declined from 8.3% to 8.1%. The previous two months were revised down by 41,000 however. Manufacturing employment was down 15,000 from July. "Food Services and Drinking Places" was the category with the biggest gains, adding 28,000 jobs last month.

Underneath the surface, the picture wasn't mediocre, it was negative. Looking at the total number of people listed as Employed in Table A indicated that 119,000 fewer Americans had jobs in August than in July. This comes from the Household survey and receives little attention from the mainstream media. This number was negative in the July release as well. Why isn't this reported?  Well perhaps the media doesn't trust people to know whether or not they actually have a job.

What happened to employment between July and August though was minor compared to the weakening jobs picture over the last five years. It was in August 2007 that the Fed cut the discount rate, which was the beginning of its attempts to stimulate the economy. By the end of 2008, the Fed's Fund rate was at zero and a number of special programs had been implemented to handle the Credit Crisis. The first quantitative easing program had begun and a second round took place after that. In respect to jobs, the figures indicate that the Fed's efforts have been an utter failure.

In August 2007, 145,794,000 people were employed in the U.S. Last month, five years later, 142,101,000 people had jobs. So after all of the Fed's efforts and all the stimulus programs implemented by the Obama administration, there were 3,693,000 less jobs in the United States.   In his Jackson Hole Speech in August, Fed Chair Ben Bernanke stated the Fed's efforts "increased private payroll employment by more than 2 million jobs". Oh really?  Why don't those jobs show up in the government's own statistics Mr. Bernanke?

What caused the unemployment rate to be reported as lower in August than in July was a decline in the labor force. It shrank by 368,000. This is only a continuation of a multi-year trend though. In August 2007 there were 79,319,000 people not in the U.S. labor force. By last month, 88,921,000 didn't have jobs. That's an increase of 9,602,000 in five years. Yet, at the same time the employable population has grown substantially.

What about during just the Obama administration? His employment record is a big issue in the current presidential election after all. The labor force population has increased from 234,552,000 to 243,555,000 or by 9,003,000 so far during Obama's term. The current participation rate of 63.5% (low for the last few decades) would indicate that approximately 5,717,000 jobs should have been created to keep employment at a steady state. When Obama took office in January 2009, 142,099,000 Americans were employed. As of August 2012, 142,101,000 Americans were employed. There was a net increase of only 2,000 jobs. This represents a huge relative loss since the U.S. needed 5.7 million jobs just to maintain the same level of employment. More jobs would have been needed to make things better.

At his Jackson Hole speech Bernanke stated how concerned he was at the unemployment problem in the United States and that the Fed was willing to do more. Considering how little impact the Fed's high risk money-printing policies have had and how little seems to have resulted from the numerous stimulus programs that have been implemented, there is no reason to believe either will be improving the economy in the future. They are good for juicing stock prices however — at least in the short term. In the long run the gains will prove to be illusory.

Sources for the above from Table A of the August 2007,  January 2009 and August 2012 Employment Situation report from the BLS. The URLs for the websites are:
http://www.bls.gov/news.release/history/empsit_09072007.txt
http://www.bls.gov/news.release/archives/empsit_02062009.htm
http://www.bls.gov/news.release/empsit.a.htm


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.

Bernanke Makes No New Promises at Jackson Hole

 

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.

Stocks underwent wild gyrations on Friday morning. First the Dow was up over 100 points just after the open on hopes that Fed Chair Bernanke would promise more QE in his Jackson Hole speech. Then, as Bernanke gave his remarks almost the entire rally disappeared. Then a few minutes later the Dow was up 100 points again.

Did anything happen to justify these market movements? The answer is no for the first rally and no for the second rally. Only the selling made sense. There was no promise in the speech for any additional QE in the immediate future. Bernanke did say "the Federal Reserve will provide additional policy accommodation as needed" as he has already stated dozens of times. This is a meaningless platitude that he repeats as often as a mindless parrot. He basically can't take any other position.

Bernanke had to admit that the economy wasn't in really awful shape, but he did emphasize that getting the unemployment rate lower was an important consideration for the FOMC. He did not make any case, nor did he offer proof that doing more quantitative easing would be effective in accomplishing this goal.  He did admit however that, "estimates of the effects of nontraditional policies on economic activity and inflation are uncertain". In other words, the central bank is playing a potentially dangerous game that might have very negative unforeseen consequences in the future.

Bernanke did admit that doing QE could disrupt the Treasury market. He stated that, "if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery".  All of the Fed's actions degrade free markets. That's why they are supposed to be effective. History has shown that markets always dominate in the end however.

Bernanke made it obvious in his speech that he doesn't think any underlying changes have taken place in the economy or financial markets. The ever-insightful Fed Chair also thought in the spring of 2007 that a mountain of subprime mortgage debt posed no risk to the economy or markets. This time Bernanke said, "rather than attributing the slow recovery to longer-term structural factors, I see growth being held back currently by a number of headwinds". Consider the Fed has been taking action since August 2007 (yes, it's been five years) and the economy still is not in great shape, you would think it might occur to him that maybe his policies don't work particularly well (note to readers: many economists are not particularly good at reality-based thinking).

Within the last few days, it has become obvious that Bernanke wouldn't promise anything at Jackson Hole. The QE touts were already making media appearances and publishing articles admitting this, but claiming that the Fed would be taking action at its September meeting. The same people said the Fed would be announcing QE at its June meeting and when that didn't happen, they said it would occur at the July/August meeting. Then it was supposed to take place at Jackson Hole. Now it's going to happen in September. Don't hold your breath.

There is no way the Fed can do QE3 before the election (unless Europe has a major collapse). It would just be too much of a political hot potato. While there are those who state correctly that the Fed has acted prior to presidential elections in the past, that was before the "Audit the Fed" movement started and before the Republicans started criticizing Bernanke's money printing. Romney has already said that if elected, he is going to dump Bernanke. Doing QE again with only the flimsiest of justifications would be seen as a blatant act to help reelect Obama and save his own job. Like QE itself, this could have "uncertain" consequences and many of them could be unpleasant.

The text of Bernanke's speech at Jackson Hole can be found here: http://www.marketwatch.com/story/text-of-bernanke-speech-at-jackson-hole-2012-08-31?pagenumber=2


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.

Credit Crisis Déjà Vu

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.

In September 2008, the markets were in sharp decline because of a bank-centered financial crisis. The authorities took action with bailouts and by buying bonds to prop up the market. Short selling of financial stocks was banned in order to stabilize the markets. Things are certainly different in 2011.  It's not that all of these events aren't happening again, they certainly are. This big difference is that now they are happening in August instead of September.

The geographic epicenter of the crisis has shifted as well. Europe is now dragging down the global financial system, whereas it was the United States that was doing the heavy lifting in 2008. Yet stocks have been down by similar amounts in continental Europe and in the U.S. this month. Whereas the U.S. was dealing with the failure of Lehman Brothers in September 2008, the EU is dealing with a selective default of Greek debt and trying to prevent new crises from arising in Spain and Italy (problems in Ireland and Portugal are on the back burner for now). Greece received its first bailout in May 2010 and then another bailout this July. The original terms of the new bailout require bondholders to take a 21% loss on their holdings. If the bondholders were just in Greece, this would not have major implications. However, French and German banks were major lenders to Greece. The Greek bailout is really a bailout for them.

Rumors have been rife that a number of French banks are in trouble and that S&P was going to downgrade them and France's AAA credit rating. Rumors also dogged Bear Stearns before its failure in March 2008. The company vehemently denied them, especially in the week before it collapsed. The SEC threatened to investigate and find the culprits spreading false rumors about Bear Stearns being in trouble. The SEC's case fell apart though after the company closed its doors. 

Any company, especially any bank, in trouble is going to publically deny it. So French banks denying that they are financially troubled, which they have done, is in and of itself meaningless. In this case, more credence can be given to S&P's statements on the matter. S&P denies it is about to downgrade the credit ratings for France or of the French banks rumored to be in trouble. It would look pretty foolish if it turned around and lowered them in the near future. S&P of course is still smarting from the reaction from its downgrade of U.S. debt from AAA to AA+. Even though the U.S. can't pay its everyday bills without borrowing money and this is as good a definition of insolvency as any, there was incredible outrage that S&P lowered its credit rating. After all, they had given the top rating to securitized mortgage bonds containing subprime loans and some of those borrowers had no income, no assets and no prospect for paying off their debts.

Another government reaction that took place in 2008 that is repeating itself in 2011 is a short selling ban. France, Spain, Italy and Belgium have just banned short selling of select financial stocks. On September 19, 2008, the U.S. banned short-selling on 799 financial stocks. Britain banned short selling on similar stocks the day before. Did it work back then?  No, it didn't. A large number of banks failed and many that didn't remained functioning only because of massive bailouts or because they were nationalized. 

Direct government takeovers were more common in the UK than the U.S. in 2008 and 2009, but just as the land of the free banned short selling, the supposedly capitalistic U.S. took over Fannie Mae, Freddie Mac and eventually GM (it had been lumped in with financial stocks as part of the short selling ban). It's not clear that the bailouts have yet to end either. In August 2011, Fannie Mae paid $500 million to buy servicing rights for 400,000 of Bank of America's worst-performing loans, loans with an unpaid balance of $73 billion. or these instead of Bank of America. Who exactly benefitted from this arrangement? Fannie Mae and Freddie Mac back $5 trillion in loans and many of them are not likely to be paid off. This debt is not counted as part of the $14 trillion plus U.S. national debt, but at least some of it should be.   

In 2011, the ECB (European Central Bank) has established a Securities Market Program to buy government bonds of its troubled members in order to keep interest rates lower than the free market rate. Its first buys were Spanish and Italian bonds on August 8th. The U.S. Fed was a heavy buyer of bonds in September 2008, although it didn't announce its first quantitative easing program until late November of that year. It also denied at the time that it was engaging in quantitative easing. Most of QE 1 had already taken place by the time the Fed announced it. This highly relevant fact remained unmentioned.

So here we are in 2011 and we find events are very similar to what was taking place in 2008. Some of the players are different, the locations are different and the order things are happening may be a little different. But all in all, it looks like the more things change; the more they remain the same.  

Disclosure: None

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


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