Oil Update - EIA, CFTC, and USD

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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Light sweet crude fell 5.8% yesterday, a crash level one day drop. The EIA weekly storage report set off the selling. Crude closed at $63.35. It was $3.60 below Brent, a lower quality oil. The CFTC has started hearings this week and traders are claiming that they are completely politically motivated. Their evidence? - the CFTC's own reports. Oil was also damaged by a rising dollar. The dollar was rallying on the 'good news' that the U.S. was printing money to buy its own bonds (no that doesn't make any sense). As has been the case since the beginning of June, when the dollar goes up, everything else went down.

The EIA reported that oil storage was up 5.1 million barrels. Distillates were up 2.1 million barrels, but gasoline stocks fell 2.3 million. The mainstream media reported that distillate stocks were at their highest level in 25 years (take that with a grain of salt). Year over year distillate demand is down 10.7% and jet fuel demand dropped 13.3%. Gasoline demand is up by 0.8% however. At his time of year gasoline is the key demand driver for the oil market.

The CFTC has started its hearings this week trying to track down the evil speculators that have been manipulating the oil market. Interestingly, on Monday the Wall Street Journal reported the CFTC "plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices - a reversal of an earlier CFTC position." On Tuesday, the Journal reported that the CFTC is "updating- but not necessarily reversing - a 2008 report that blamed supply and demand, rather than speculators" for last year's spike in oil prices. So let me summarize this news for you. The CFTC already investigated this subject last year and found that the oil market like every other market operates on supply and demand. Not trusting its own work and the basic laws of economics, it has decided to investigate again. To get to the truth, it is holding hearings. However, before the hearings have even begun and data gathered, a decision was already made to blame speculators in the report that will be issued. At this point, you should be smelling a giant rat the size of Washington, D.C.

I actually don't doubt for a moment that there is speculation driving the price of oil to non-market prices. It's not taking place on the trading floors in New York, London or Singapore however, but from government offices on the Potomoc and Thames. To help clarify this picture, it might be a good idea to change Ben Bernanke's title from Fed Chair to Speculator-in-Chief. At least then, the public would know what he is really up to.

NEXT: Economy is Bad, but GDP Report is OK

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.

Energy, Commodities and the U.S. Dollar

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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Light sweet crude fell below 60 this morning in European trading. It has traded as low as 58.86 pre market. Brent seems to be trading higher, which is unusual since it is a poorer quality oil . This type of price inversion was common in February when oil hit its bottom. While a number of commentators claim 60 is strong support for light sweet crude, there is a Fibonacci retracement around 58 and this is a place where the price could hold. We will have to see. There has been too much selling too fast in the oil market and it is has been based on attempts at government manipulation of the market through the CFTC, not because there is an oversupply of oil as the press continually and inaccurately reports (oil in U.S. storage is actually dropping at a precipitous rate).

While the CFTC has regulatory power over all commodity trading in the U.S., it specifically singled out the energy markets for potential trading restrictions. Even though the alleged reason was speculators were causing high prices, it is planning on investigating the natural gas market even though natural gas is trading at a multi-year low (obviously those speculators are incompetent). The real motivation behind the CFTC's action is that the EFT UNG owns 20% of the futures contracts in the market and this is making the big Wall Street players uncomfortable. Issuance of new shares of UNG were suspended on July 7th because regulatory approval wasn't forthcoming. Without the ability to issue new shares with increasing investor demand, an ETF turns into a de facto closed-end fund. Expect this to eventually happen to every ETF. The vested interests are not going to let small investors hone in on their turf.

Every commodity has had a big sell off during July trading and it can all be traced to the CFTC. Fundamentals have nothing to do with it in the case of oil, gold and silver, so you should assume a reversal back to previous values will take place once this is over. While commodities usually trade inversely to the dollar, there has been no dollar rally. The trade-weighted dollar bottomed in early June at 78.40 and has only gotten about 3 cents above the level at its best since then. It closed under 80 again yesterday. Even this morning though the media was reporting 'oil and gold selling off on higher dollar'. They have reported this same story over and over again. One of the news reports today didn't even have any price quote for the dollar, a violation of basic reporting rules. They know their whole story falls apart if people actually have the facts in front of them.

As for the CFTC, will it be investigating manipulation of the silver market by the two big banks with huge short positions? They have been made aware of this, but like the SEC with Bernie Madoff the CFTC is a hear no evil, see no evil operation when it comes to large Wall Street interests manipulating the commodity markets. That is as long as that manipulation supports the government's desire to help prop up the dollar and the economy with lower gold, silver, and oil prices. Short term manipulation eventually leads to long term problems however. Commodity producers just stop producing when the price gets too low and then shortages result if the price is held down too long. Natural gas is probably priced around that level right now.

NEXT: The Non-Stimulating Economic Stimulus Plan

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.

Technical Damage Continues; Fed Decision Today

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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While stocks retreated only slightly yesterday, the drop was more significant than the numbers indicated. The market needed a rally to improve the technical picture, but is so weak it couldn't go up even a few points. The Dow closed below its 50-day moving average for a second day in a row and below its 200-day for the seventh day. The Russell 2000 instead of bouncing off of its 200-day moving average sank below this key support level. It broke support at its 50-day on Monday. The Nasdaq is the only index that still has an adequately healthy technical picture.

Despite press reports yesterday about the U.S. dollar rally and the potential negative consequences for gold, silver, and oil, the trade-weighted dollar dropped yesterday and closed at 79.89. This is not too far above its breakdown level of 78.33. A drop below that could send the dollar to around 72 pretty quickly. The much vaunted dollar rally that the press has been trumpeting was at its peak so far a 'huge' 3.6 cents off the bottom (you'll need to put your glasses on to see it). Examination of the DXY (the trade-weighted dollar ETF) chart, shows the 50-day moving average fell below the 200-day moving average in early June - a bearish sell signal. This negative news hasn't appeared in any articles I've seen about the dollar. When push comes to shove, the mainstream financial media doesn't like reality to interfere with the story it wants to tell the public. You need to keep that in mind.

While stocks and the dollar fell, light sweet crude rose yesterday and closed at 69.24. It is back below 69 this morning. The weekly storage report will be out today at 10:30AM New York time. Expect it to set the direction of oil prices for the next couple of days. Oil has suffered in the recent sell off, but isn't showing the technical damage of the stock indices. The exception is the drillers, which have really been devastated. Unless you think there won't be a need to drill for oil in the future, you should assume these are getting to major bargain prices.

The Federal Reserve has a two-day meeting this week and will be releasing an announcement around 2:30PM New York time. There is zero chance they will be tightening interest rates, although Bernanke made noises a few weeks ago about doing so this fall and draining liquidity from the international financial system was a major item of discussion at the recent G8 meeting. You would be justified in wondering what these people were smoking. It must have been some very powerful hallucinogen if they are seeing a sustainable economic recovery without continued government stimulus. The Fed's announcement today though could move the market one way or the other regardless of whether or not it makes any sense.

NEXT: Fed Knows Inflation is Coming; Oil Supply Slips Again

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, Oil, Dollar and Market Update

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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Gold and silver had sharp sell offs this morning, while the dollar rallied. If you believe the press reports (and in general, you shouldn't), gold and silver sold off because the dollar was rallying. The dollar was supposedly rallying because of bad figures on Eurozone industrial production. Are they likely to be worse than the U.S. production figures after GM's bankruptcy (production is being closed down during the summer)? Probably not. If you look, you will see despite the screaming headlines the dollar was not up that much. As of now, the trade-weighted dollar is trading at 80.07, up from yesterday's close of 79.36. The breakdown point is 78.33.

The drop in gold and silver is more than overdone. Gold closed strongly yesterday at $962. Optimism for the U.S. dollar is also being fueled because the treasury auction went well this week and there was supposedly heavy demand for long-term U.S. treasuries from foreign buyers (I had difficulty not laughing as I wrote that last statement). What outrageous claims will the government make next? For those not paying attention, interest rates on the 10-year bond hit 4% yesterday, double the low of 2%. Not exactly and indication that these bonds are experiencing increasing demand relative to supply (interest rates would be falling if this was true, looks to me like they doubled).

Oil was over 73 yesterday and I began taking some profits in ERX and to a lesser extent DXO. The oil rally has been going on four months now and seems to be losing steam as we approach major resistance around 77. Stocks are likely to get into trouble when the S&P gets to 1000. Resistance is very strong at that point. When you have large profits, its always a good idea to take some money off the table.

For those who don't want to hold U.S. dollars, there are a lot more options in ETFs than there used to be. While we have mentioned FXA and FXC (the Australian and Canadian dollar ETFs) previously, you can now buy New Zealand (BNZ) dollars as well. You can even buy emerging market currencies such as the Brazilian Real (BZF). For a more complex trade, you can consider DBV. This ETF is double long the three G20 currencies with the highest interest rate and simultaneously short the three currencies with the lowest interest rate.

NEXT: G8 Hot Air Inflates Dollar

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.

Oil Gases Up; Bear Bites Dollar

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.

Week after week after week this spring the media reported a glut in U.S. oil supply. This blog and the New York Investing meetup had to debunk this view of the state of the energy markets more than once. The supply report today once again confirms that the only glut that existed was in the imagination of reporters working for the big media outlets. Storage was way below expectations across the board for oil, gasoline and distillates. This has yet to happen in natural gas, but the market is in super contango just as the oil was in January and early February of this year. Indirectly bullish for oil and natural gas going forward was Russia's announcement today that it is reducing its U.S. Treasury holdings.

Expectations for the EIA's storage report was for a drop of 500,000 barrels of oil and an increase of 750,000 barrels of gasoline and 1.5 million barrels of distillates. Instead, oil in storage fell by 4.4 million barrels, gasoline fell by 1.6 million barrels and distillates fell by 300,000 barrels. This is the third oil report in the last four weeks that indicated a large drop in storage. The oil markets barely moved on this incredibly bullish report, although light sweet crude has been trading today around 71, above the key resistance point of 70.80.

Unlike oil, which has been rallying since mid-February, natural gas has been in the doldrums and is the worst performing commodity this year. This may be changing soon. Natural gas futures are in super contango - the distance future contract are priced well above the near term contract. The July contract is currently priced around $3.80, but the December contract is priced above $6 or more than 60% higher. Oil had the same behavior just before it bottomed and then went up for four straight months. Pay attention to this.

Although it is not getting much play so far, the most important news to come out this morning is that Russia plans to reduce its U.S. Treasury holdings. Along with China, Japan, and the Gulf Oil States, Russia is one the 4 biggest foreign holders of U.S debt. Russia says that it is not selling its U.S. bonds, but will just not replace them when they mature (you should read this as: Russia refuses to buy any more worthless U.S. debt and help us fund our deficit, so we are going to have to print even more money than we were planning). While this may sound like a minor change, it could devastating for the U.S. Dollar. Once one of the major debt holders starts bailing, there could be a stampede for the exits. Did the dollar nosedive on the news? Of course not, it actually went up afterwards. We will have to see just how long central bank intervention can forestall the market's gravitational effects.

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NEXT: Disaster Stalks the Dollar

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 Saga Continues; Commodities Take a Hit

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 sell off in the market yesterday was concentrated in commodities with sharp moves down in anything related to them. Most commodities, particularly those related to oil were at important overbought levels and needed to come down to take some pressure off before they could go to higher highs. A week or even two weeks of selling was compressed into a single day. While this is frightening to look at when it is happening, it is the slow gradual declines that are far more dangerous. Sharp declines create gaps that usually have to be filled and hit support levels very quickly so buyers are encouraged to come right back in. So far many commodity stocks simply sold back to their 10-day moving averages - normal behavior in an uptrend.

The stocks of commodity producers were far more damaged that the commodities themselves. Light sweet crude, which closed at 68.45 earlier in the week, closed at 66.12 yesterday. It's intraday low was 64.95. This drop is hardly remarkable after a six day major move up. In mid-morning European trading NYMEX oil was back up to 68.17 and you would never have known anything had happened if you had been away for the day on Wednesday. Oil started selling down again when the American market opened, so we will have to see what happens.

Gold fell as low as 960, but rebounded to 975 in Euro trading. Silver fell almost to 15.00, but was as high as 15.50. Gold is hoovering under the key 1000 level and silver is trying to break its resistance at 16. Silver was as high as 16.20 in overnight trading on Tuesday. Like oil, the precious complex was selling down on the trade-weighted dollar bouncing off major support at 78.33. The dollar was 79.90 in early trading this morning. The monetary authorities seemed to be pulling out all stops to save it from falling into the abyss. It remains to be seen how long they can be successful.

Bernanke was out with commentary on the economy yesterday. The news media headlined his remarks as "Bernanke Sees No Inflation in the Near Term" (what a convenient headline when the dollar is about to breakdown because of inflation concerns - must be coincidence). For those who don't remember, Bernanke also said in June 2007 that subprime mortgages weren't a risk to the financial system. One month later the subprime crisis blew up. While Bernanke may not be worried about inflation showing up in the next few weeks, his remarks were far more pessimistic than the headlines indicated. He did acknowledge that if the U.S. doesn't get its budget deficits under control there could be significant problems in the future. Of course, Bernanke could just stop engaging in easy money policies that help support the government's spending addiction. This won't happen because Bernanke would first have to face that he was co-dependent serial inflator. Maybe the world's central bankers should form a 12-step support group?

The June meeting of the New York Investing meetup will be held tonight June 4th, 6:45PM at PS 41, 116 West 11th Street. See the website (below my name) for details.

NEXT: Monthly Employment Report and the Market's Reaction

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.

Oil Takes Gas, Silver's Shining Moment, GM Watch

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 oil inventory report was delayed this week and it was bullish big time for the third week in a row. The natural gas report was just better than expectations, but even this minimal accomplishment proved a combustible mix that caused UNG (the natural gas ETF) to shoot upward. SLV (the silver ETF) traded over 15.00 this morning, removing all doubt that a breakout has taken place from strong resistance around 14.50. News reports are indicating that some progress is being made with GM bondholders in a last minute effort to avert the largest industrial bankruptcy in the history of the United States.

Analysts expected that U.S. oil inventories would rise 1.8 million barrels last week. Boy did they get a surprise! Inventories fell by 5.4 million barrels. Gasoline, the major use for oil during the summer months, had 600,000 less barrels in storage. Year over year U.S. gasoline demand is down only 1.2% despite the troubled economy, yet oil is still 47% off of last year's high. Despite dropping supply and the barely lower demand for gasoline compared to the much lower price of oil, you can still find bearish comments on oil in media coverage. Our favorite oil ETF, DXO, has continually told an opposite tale however - and when in doubt, the market is always right. DXO broke above 4.00 today and should be heading higher until light sweet crude reaches at least $75 a barrel. Triple leveraged energy company ETF, ERX, is having an even better day after consolidation around support between 29 and 30 level.

While oil may have only a month or so left of its rally (frequently when the most money is made), natural gas is still putting in its bottom and I have been accumulating UNG since it fell back to the low 14's. Unlike oil, the fundamentals of natural gas are indeed negative and have been for a long time. Moreover, the favorable seasonal for natural gas can begin as late as July as opposed to February for oil. The peak is most likely in late October, early November, while oil statistically peaks in early August. This week, analysts expected U.S. storage of natural gas to increase 111 bcfs (billion cubic feet), but the increase came in at only 106 bcfs. In a heavily shorted market, that was enough to generate a big move up.

In the precious metals, SLV trading above 15.00 today was quite impressive. At the moment silver is doing better than gold, but it has a lot of catch up to do. Gold is only 4% off its recent highs of 1000, while silver is about 30% lower than it previous high around 21. SLV has another point of resistance at 16. After that, SLV testing 21 is almost certain.

Some progress seems to have been made with GM bondholders this morning. It is still too early to tell if this will come to fruition. Whether or not GM declares bankruptcy (allowing this to happen will be one of the biggest economic mistakes that the U.S. government has ever made) is obviously going to go down to the wire. The stock has not fallen below a $1.00 today however and is actually up 10% at the moment. When the market thinks a company is going bankrupt, it pushes its price into the penny level. Watch to see if this happens. While a GM bankruptcy will weigh on the market, the avoidance of bankruptcy would cause a big rally next week.

NEXT: Silver, Oil , Gold - Market Screams Inflation

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.

Oil Inventory Report Super Bullish; Watch Silver and Gold

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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Nymex oil was as high as $60.08 a barrel yesterday, another six month high. The oft quoted 'experts' are still bearish as they have been all the way up from $33 a barrel. While it has received little attention, silver has been rallying nicely and is approaching resistance around $14.40. It is likely to get sticky around that level before a breakout can take place. Gold has been trading above, but close to its 50-day moving average for the last four days and the moving average pattern is trying to become bullish. Nova gold (NG) mentioned in this blog yesterday was up 15%. It has strong resistance only 20 cents higher, so it's not likely to be at a great entry point at the moment.

Oil is a very seasonal commodity and on average the price peaks the first week of August. The peak can actually take place anywhere between June and September. If you wish to be as conservative as possible, there is at least another month left to the oil rally. There could be two or three. Points of strong resistance include $70, the high during hurricane Katrina; the $76-$78 range, which includes the 38% Fibonacci retracement of the sell off and oil's last major breakout point before it went to $147 a barrel (this combo makes this resistance area particularly formidable); and $90, which is the 50% Fibonacci retracement of the sell off. You might need a hurricane heading toward the Gulf of Mexico to get to that level on this go around.

The EIA storage report just came out and blew the bears out of the water. Oil analysts had predicted oil in U.S. storage would increase by 1.4 million barrels. Instead, oil in storage decreased by 4.7 million barrels. Gasoline supplies were supposed to be up 400,000 barrels, but dropped 4.1 million barrels. While there was an immediate market response on the upside for oil and oil companies, I suspect a bigger rally will not show up for a couple of more days (this has happened before).

It is my belief that as the stock market fades, and this should be happening within a month or so, that gold and silver will start to shine. While there are people who are predicting gold will fall to $600, there have been a number of supposed oil 'experts' that have remained bearish during the entire oil rally. You can expect the gold bears to remain vocal all the way up as well. Watch the charts if you want to know what is really going on. Moves to higher levels and breaking above resistance are bullish signs that will tell you that gold and silver want to continue to rally. For gold, 1000 is the key level and when that is broken, a significant move up should follow shortly thereafter.

NEXT: Market Pull Back or Top?

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.

Fed Minutes Take Oil on Roller Coaster Ride

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:

It would be easy to get whiplash watching the oil market these days. The news was grim early in the morning yesterday with blaring headlines of oil falling below $48 a barrel in anticipation of a bad news oil storage report at 10:30AM. Storage however turned out to be below expectations and oil started rallying immediately. NYMEX oil got to over $51 a barrel mid-day, rising above the key breakout point around $50.50. Then late in the afternoon the minutes from the last Fed meeting were released and even though they should be taken about as seriously as a Mel Brooks movie, oil nosedived on the Fed's gloomy outlook for the economy. In the end oil was up 23 cents, closing at 49.38, though today in mid-session European trading it's above $51 again.

The price of oil was weak early Wednesday because of a report Tuesday evening from industry group, the American Petroleum Institute, that indicated there was 6.9-million-barrel build in storage.This report is not terribly reliable because it is not comprehensive and submitting data is voluntary. The government's EIA report that came out the next morning, painted a very different picture of the oil market. Oil in storage rose 1.7 million barrels, much less than the 2.3 million barrels that analysts had predicted. Distillates, which include heating oil and diesel, fell by 3.4 million barrels versus expectations of a drop of only 600,000. Gasoline demand was reported as being 0.2% below a year ago (if demand was 100 a year ago, it is now 99.8). While the drop in U.S. gasoline demand is something you would need a magnifying glass to see, the mainstream media has continually reported it as collapsing and falling off a cliff or words to that effect.

Despite the bullish tone of the storage report, oil (and most of the rest of market) sold off big time when the meetings from the Fed's March meeting were released in the late afternoon. The Fed, which didn't see the Credit Crisis coming, miscalculated it at every twist and turn, and didn't foresee the recession, is now gloomy for the next two years going forward. Sure they were wrong over and over and over again, but now they know what's going on. The minutes also indicate the Fed is worried about deflation even though it is stated in the same minutes that they are printing new money like no tomorrow. Worrying about deflation under such circumstances is like worrying about being attacked by Big Foot while walking through Central Park. The probability is somewhat less than zero.

While gasoline demand in the U.S. is flat, it should be rising in China. For the last three months cars sales in China have exceeded car sales in the U.S. Year over year, car sales are down 37% in the U.S., but up 5% in China. China is on its way to becoming the number one auto market and the number one energy user. Oil demand is shifting from North America to East Asia while the ability to produce oil is declining 6% a year by some estimates. There are even predictions out there of an oil price spike as early as later this year. While I don't necessary believe it will happen that soon, it will indeed happen as some point.

NEXT: It's Not the News, It's How the Market Reacts to the News

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 and Silver Rise, Oil falls

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 and silver continued their climb yesterday, while oil scraped along the bottom. The prices of all three are affected by the value of the U.S. dollar and inflation. As we covered in this blog yesterday gold demand hit a record in 2008. You can assume it will hit another record in 2009. Investment buying is the main driver, with the GLD ETF increasing its holdings 200 tons in the last month alone. Demand for oil on the other hand is falling, but not by nearly as much as the press would have you believe. The supply is likely to be falling much faster sometime in the next several months. Oil is a major bargain now, just as gold and silver were last October and November.

Gold closed at 978 in the futures market yesterday and reached 986 in London trading this morning. It should soon reach its all time high just above $1000 an ounce. Expect some selling in that area, but assume it will only be temporary. The current rise in gold is taking place because of a loss in confidence in the global financial system. This is not something that can be fixed over night, it will take many years. Gold and silver will be good investments during that period as people lose faith in paper currency and see that it is continually losing its value. Once gold breaks decisively above 1000, it should move to 1200 in a very short time. The next stop after that should be around 1500. Global governments are likely to try to dampen enthusiasm at that point by announcing an IMF gold sale or engaging in some other manipulation (a chronic problem in the gold market).

Silver always follows gold and is still far from its previous high around 21. Silver closed at 14.29 in the futures market yesterday. It's recent rally has been powerful just like gold's. Silver broke through major resistance in the mid 13's like a knife slicing through hot butter. The next stop is around 16, where the resistance is even more formidable. Expect some problems in that area. Above that there is minor resistance around 19 and then the important old high of 21. Unlike gold, silver has not made a new all time high yet. The old high from 1980 is in the 50s. It will get there eventually.

While gold and silver are operating on all cylinders, oil is languishing in the mid 30s. Light sweet crude (there are many grades of oil) may have doubled bottomed at 33+, only time will tell. Fundamentally, oil is cheap especially since it is priced in U.S. dollars, which are incredibly overvalued. The alleged oversupply of oil doesn't stand up to scrutiny either. While the supply has been building up in the U.S., the price of gasoline has been rising steadily. If there is so much oil supply why isn't it used to produce gasoline, which is obviously in short supply if the price is rising? Either there is no oversupply of oil in the U.S. or some form of manipulation is going on. You can decide for yourself.

NEXT: Oil Yes, Financials No

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.

Deepening Global Recession Means More Inflation

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 economic news out this morning corroborates a deepening global recession. GDP in the eurozone fell 1.5% during Q4 2008. This is the third drop in the row and the steepest. Predictions are that Japan's Q4 GDP will fall somewhere around a 10% annual rate. Media coveraged emphasized how the U.S. economy was doing better than those overseas, rather than questioning the absurdity of the U.S. GDP figures. Dire warnings of DEFLATION were mixed in with the reporting.

While it is true that declining economic growth leads to falling demand (an economic argument that discusses only demand and not supply is meaningless) and the current declines are rivaling the Great Depression in the 1930s, this doesn't mean there will be deflation this time around. During the Depression, the U.S. monetary authorities contracted the money supply in the beginning, which is a major reason the Depression lasted so long and became so steep. Currently, the monetary authorities are inflating the money supply at a rate worthy of Weimar Germany in the early 1920's or Brazil in its inflationary heyday. Simple common sense indicates the outcome will be different now than it was in the 1930s.

The truth will be found in the markets. While they can be manipulated in the short term, in the long term they have to move to accurate price levels (unless the government bans trading, which has indeed happened many times in the past). Even though constant efforts are made to suppress the price of inflation-indicator gold, it is nevertheless still rising and could easily hit a new all time high sometime within the next several weeks. It reached 950.00 in futures trading yesterday, just a smidge below the 1000 level. Silver has also been rallying strongly in the last two months. Oil is trying to find a bottom at current levels and expect it to put in a good rally once it does.

Anyone who reads this blog knows the alledged deflation that is taking place is accounted for almost completely by falling oil prices. While the manipulations in the gold market are well documented, oil is probably even more manipulated but in different ways. Right now Light Sweet Crude is in extreme contango (prices for futures months are much higher than the current price). While the current oil contract was trading at $34.45 this morning, April was trading at $42.14 and June was trading at $47.62. Also the price of Brent (an inferior grade of oil) is way above Light Sweet Crude, with Brent trading at $45.90. This is the reverse of the usual price relationship and is somewhat analogous to table wine costing more than a good champagne. Light Sweet Crude may have put in a double bottom yesterday (only time will tell), falling to $33.98, close to the low of $33.16 reached last December 19th. Press coverage on oil seems to have changed this morning, with some talk about how supply is going to be reduced at current prices and how this can support prices even though demand is falling (did someone recently give the reporters a basic lesson in economics?).

Ignore all the talk about deflation coming from the press and well-known deflationists like Noriel Roubini (who is predicting a big decline in consumer prices). Yes, global economies are sinking, but monetary and fiscal stimulation (both of which are inflationary) are being applied at historically high levels. It's only a matter of time before they work their (black) magic. Just remember though that it takes many years before the full impact of inflation shows up.

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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 Truth About Deflation - A Crude Analysis

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:

In a carefully orchestrated media campaign to justify its money printing spree, the U.S. government has been trumpeting the need to counteract the threat of deflation. While there has been disinflation (lesser inflation) since this July when a concerted global central bank intervention began to drive up the value of the U.S. dollar, even the highly under reported inflation rates that the U.S. government publishes are still positive. A look inside the figures indicates quite clearly that there is only one major source for dropping prices - oil and its derivative products. If this reverses (and it will), watch out.

The PPI for November fell 2.2% after a record drop of 2.8% in October. The core which excludes food and energy was up 0.1%. Energy prices fell 11.2% after a 12.8% drop in October. Gasoline prices had a second record monthly decline. Home heating fuel fell by a whopping 23.3% (you should note that prices are down the most just as demand it rising substantially, which doesn't make sense if supply is not changing). Food prices were unchanged on the month. For the year, PPI is up 0.4%, but the core is up 4.2%. Overall PPI could indeed be reported as negative for the year when the December figures are released.

The seasonally adjusted CPI fell by 1.7% last month - the biggest drop since 1947 when seasonal adjustments were created. Core prices were unchanged however. Food itself was up. The cost of home ownership was up. The cost of health care was up. Energy prices however were down 17% . Gasoline prices fell an eye-popping 29.5% (gas prices went down at least 75 consecutive days in a row this fall, something which has never happened before). For the year, CPI was up 1.1% and the core is up 2.0%.

This morning the NYMEX light sweet crude contract hit $38.16 even though OPEC just said it would cut daily production 2.2. million barrels (the market is sceptical that this will actually happen). This is approximately a 75% drop from the early July high. This amount of drop is too much too fast. While I do not have exact figures, oil appears to be getting close to its cost of production. Could that level be as low as $35 or even $30? Yes it could. Whatever the bottom price is, the threat of deflation will likely disappear once it is reached .. and that should be soon.

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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.