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.

Gas Takes Gas

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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Natural gas, the commodity, is having one of the most spectacular rallies of all times. It was up 11% yesterday alone. The near term contract hit a low of $2.40 and seems to be heading toward $4.00 (a low estimate of production costs). Even after the spectacular rally of the last few days, Natural gas futures are still in extreme contango. The October contract closed at 3.297 yesterday, while the February contract closed at 5.324. Actions of the commodities regulatory body, the CFTC, and its attempts to limit trading in the natural gas and oil markets have been responsible for natural gas's economically impossible behavior.

The CFTC drove oil ETF DXO out of business and is essentially trying to do the same with natural gas ETF UNG. UNG's price was artificially suppressed by actions of the CFTC and it has ceased to function according to any normal trading rules since this has taken place. An announcement from UNG that it would begin to issue shares on a restricted bases starting September 28th helped stoke yesterday's rally. By the beginning of the summer UNG owned 20% of futures contracts in the natural gas market and the big market players wanted the CFTC to crack down on it. Driving natural gas prices way down is also beneficial to the economy, so the government had a double motivation for interfering in the market.

An alternative ETF, GAZ, has been left alone by the CFTC and more closely reflects price action in the natural gas market. It's price movements are by no means ideal however. GAZ was up 4.5% yesterday, while UNG was up only 2.5%. Neither was up anywhere near 11%. The best performing Natural gas ETF was HZBBF (special thanks to New York Investing meetup member Kim L. for finding this obscure stock). It was up 19% yesterday. HZBBF seems to be the same as Canadian ETF HNU which represents two times natural gas (just as DXO did for oil), but it trades in the U.S. markets.

Natural gas is more subject to manipulation than other commodities because it is sold in regional markets. Unlike oil, it is hard to ship. Historically prices for natural gas are twice as much in Europe and Asia as in the U.S. Government attempts to control prices - and this is what the CFTC action represents - ALWAYS lead to shortages in the future. Natural gas will be no exception. Years from now we will look back and be amazed that natural gas was trading at $2.40 in 2009.

NEXT: Precious Metals Becoming More Precious

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.

Gold Closes at Record High

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:

Gold closed at a record high in New York on Friday. The settlement price of $1004.90 broke the previous record of $1003.20 set on March 18, 2008. The daily intraday high was $1011.90. This is gold's third serious attempt at trying to break to new all time highs. The $1000 level has been tested 5 times so far. A basic rule of technical analysis is that when a price is repeatedly tested, it will eventually break.

A yearly high is bullish and a record high is extremely bullish for any stock or commodity. You would never know it from reading the media reports on gold however. I have seen one article after another warning about how dangerous it is to buy gold at these prices, how a pullback is likely, how the small investor had better stay away, etc., etc. This is actually very bullish for gold. If the media liked it and was saying how great it was, it would probably be time to sell.

Negative media reports all focus on lack of physical gold demand at the moment, particularly in India (Indian consumers own 20% of the world's gold - at least as much as all central banks combined). While this is likely a temporary phenomenon based on when Indians consider it a propitious time to buy gold, you don't usually see that mentioned in articles. You frequently don't see inflation mentioned either and that the demand for investment gold is skyrocketing. This type of demand will eventually overwhelm all other forms of demand. You can also find many articles that report that the ETF GLD isn't buying gold and how negative this is for the market. What is not mentioned is that there are 10 ETFs on world markets that buy physical gold. Overall, there has been net buying recently. Only one of the ten ETFs had decreased holdings and that was GLD. Long gold futures positions have increased by 17% in the last week to 10 days and many investors are likely moving away from physical metal to more leveraged plays.

Gold's recent performance has been helped by the U.S. dollar. The trade-weighted dollar was as low as 76.46 on Friday, well below its breakdown level of 78.33. It is up slightly this morning and gold is hoovering around $1000. The dollar is in danger of hitting a yearly low soon (75.89 at the moment) and if that happens it could fall to its all time low below 72. Some short term rally is likely because the dollar is trading below its falling 50-day moving average. This could in turn cause a short-term drop in gold prices. This would just be another buying opportunity however.

We will be discussing the gold and silver markets at the New York Investing meetup's 'Technical Analysis - Chart Patterns' class this Tuesday night at PS 41 (116 West 11th Street). The class will be held from 6:45-8:45PM.

NEXT: Gas Takes Gas

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.

Markets Catch Swine Flu

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 only pandemic that you need to worry about right now is that global markets are being infected by swine flu hysteria. The Asia markets sold off last night, Taiwan and Hong Kong for the second day in a row with both down 1.9%. The Nikkei dropped 2.7% and South Korea's Kopsi was off 3%. As I write this, major European markets are down between 2.1% and 2.8% and S&P futures are down 1.8%. Oil if falling from the above the 50 level again (this has become a recurrent pattern as of late). Most amazingly, gold is down about $20 in the futures market, even though the price of gold should go up during a crisis (is this telling us something about the Fed meeting taking place this week?).

The media's handling of the swine flu news is incredibly irresponsible and outrageous (keep this in mind when reading financial news which is not handled that much differently). You would think that another Medieval Black Plague was about to strike. Just as in investing reporting the facts get buried amid the hype and the news deviates significantly from reality. So far, it doesn't look like there are any deaths outside of Mexico. While flu has been found in 40 people in the U.S. who had traveled to Mexico, the cases seem relatively mild and this seems to be true in other countries as well. The disease seems to be one thing in Mexico, but quite another outside of Mexico. This is a huge inconsistency that doesn't make sense, so there is obviously more to this story than is being reported, or perhaps it would be more accurate to say, less to the story.

So far the most damaged stock groups from the Swine flu news are airlines and hotels. AMR, UAUA, and LCC were all down in the double digits yesterday. They are still not buys however since they were already overextended on the upside when they began selling off. They would have to have about 4 serious days of selling to make them interesting for other than day trading purposes. Anti-viral biotechs were the big winners, most going up well into the double digits. Expect them to come right back down once the crisis blows over. At that point they might be longer term buys. If you want to take a look: BCRX, BTAHY/BTAHF, GNBT, HEB, NVAX, PPHM, and VICL. Only very experienced traders should play with these stocks.

Wall Street reaction to the swine flu is as would be expected. Hearing the word swine, the usual suspects have answered the call. One market analyst is out on the net with a statement that the market could drop 15% (if this turns out to be as bad as SARS that is - it won't be, the two aren't comparable at all). One oil analyst has come out with a prediction that oil will go back to $33 a barrel because air travel is likely to have a huge drop. My guess is this is all going to be much ado about nothing. Even though the swine flu may disappear, don't assume the swine on Wall Street will have done the same. You always need to worry about them.

NEXT: The Stupidity Pandemic; U.S. GDP Tanks

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 Fed's Manipulation of the Stock Market

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 New York Investing meetup has made a companion video to this blog entry. To see it, please go to: http://www.youtube.com/watch?v=Sobq7wCXjUw.

The Federal Reserve began a campaign of blatant and purposeful manipulation of the U.S. stock market on August 15, 2007. One hour before the futures expired for the month, it announced a surprise cut in the discount rate. Dow futures rose almost 300 points immediately (there was some noticeable rise just before the close the previous day, indicating some big money players had probably been tipped off early) and the huge profits of the shorts evaporated in an instant just before they were about to be cashed in. This changing of the rules just before the game was over had no justification as per the Fed's official mission. Lowering the discount rate one hour later would have had no difference in impact on employment or inflation . It did make a difference on the bottom line of the issuers of the futures (some of whom may have board seats on the regional Federal Reserves), who received a sudden windfall because of the Fed's destruction of this free-market trading mechanism.

As unconscionable as the Fed's actions were on August 15th, they were only beginning of a long campaign aimed at propping up the U.S. stock market. The Fed's rate cutting began in earnest on September 18, 2007 with a 50 basis point cut in the Fed Funds rate. The market already having rallied since the surprise August move by the Fed reacted with great enthusiasm continuing to go up and hitting new highs by early October. However like a junky who continually needs a larger dose of drugs to maintain a high, the U.S. stock market needed larger doses of Fed stimulation to stay at a high as well.

When there was only a 25 basis point cut it late October, stocks started selling off. The Fed realizing things weren't going as planned, did its largest liquidity injection into the U.S. financial system since 9/11 the very next day. This still wasn't enough stimulation for the market however and stocks continued to sell down. In mid-November, the Fed announced a substantial end of the year liquidity boost that finally arrested the selling -at least for a short while. The December rate cut of 25 basis points was also not enough for the market and stocks sold off the following few days. Even the new TAF (term auction facility) announced at the time was only good for a very short rally.

By the beginning of January, the stock market was clearly falling apart. On the third trading day of the year, stocks gapped down and heavy selling was taking place. The Fed then announced an increase in the amount of the TAF. This had little noticeable impact on the selling. On Martin Luther King day, U.S. markets were closed, but markets in Europe and Asia were going into free fall. Before the U.S. markets opened the next morning, the Fed announced the first interim meeting rate cut since 9/11. The huge 75 basis point cut was the biggest since the early 1980s. It worked in stabilizing the U.S. stock markets, but was not enough to make them go up. Only eight days later this was followed a 50 basis point cut and the markets still seemed to languish.

By early March stocks hit even lower lows and the market looked like it was about to fall apart just as the Bear Stearns crisis hit. The Fed would respond with an injection of liquidity that was so massive that what came before seemed almost insignificant in comparison. With international markets once again leading the way down, the Fed moved to bailout Bear Stearns, guaranteeing $30 billion of its questionable loans. The TAF auctions were up to two $50 billion auctions for the month. Two new credit facilities were created the TSLF (Term Securities Lending Facility) and the PDCF (Primary Dealer Credit Facility) with the purpose of moving hundreds of billions of dollars more into the financial system. The regular credit operations of the Fed were upped to the max as well. And to top it all off another 75 basis point cut in the Funds rate was added for good measure.

Why did the Fed embark on the path that it did, seemingly oblivious to the destruction it was wrecking on the U.S. dollar and the potential risks of out of control inflation? The simple answer was the Fed was desperate to prevent a recession in an election year and became myopic to all other implications of its actions. As the New York Investing meetup had predicted previously, March would be the end of most of the Fed's rate cutting if this was indeed the case. Since it takes about six months for Fed cuts to effect the economy and the election was in early November, the biggest impact of a fed action would result if it took place by March. This is not to say the Fed would do nothing in the months that followed, only that it moves then would have much less impact on the election.

Ben Bernanke was not just myopic concerning a possible recession however. He was also myopic concerning inflation. According to his research the Depression could have been prevented if the Fed had increased liquidity dramatically in the beginning and acted to prevent bank failures - exactly the actions he has been engaging in. However, the U.S and world were very different places in the 1930s than in the early 2000s. Currencies didn't float, the dollar wasn't in a severely weakened state, the U.S. wasn't the biggest creditor nation in the history of the world; the U.S. economy wasn't based overwhelmingly on consumer spending and borrowing, but on manufacturing and agriculture; and globalization hadn't shifted economic power to other countries. To apply ideas that might have worked in the 1930s to the situation that existed in the 2000s was pure folly. It wouldn't be the first case of governmental folly in the history of economics. Indeed, widespread mishandling by those in charge is a necessary condition to create a major economic disaster.

NEXT: Credits of Mass Destruction

Daryl Montgomery

Organizer, New York Investing meetup

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