Gold Shining, Silver Lustrous

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 traded as high as $970 in the futures markets yesterday. It is once again getting close to that magic $1000 level. Silver traded as high as $14.73, well above important resistance of $14.50. Meanwhile, the trade-weight U.S. dollar closed at 77.77. Tuesday was the second day below its breakdown level of 78.33. So far this morning it's trading lower.

A basic idea in technical analysis is that if a resistance point is tested enough, it will eventually be broken. Gold's all time high so far is $1032.70 set in European trading in March 2008. It broke 1000 again this February. It almost got back to 1000 again in early June. The end of the year starting in August is when gold is strongest seasonally. So, things look promising for the breakout from 1000 at some point fairly soon. A breakout after several tests is usually very bullish.

The fly in the ointment is of course the U.S. dollar. The key 78.33 level is the low during the late 1980s, early 1990s sell off. It was THE low for the trade-weighted dollar until it was broken in September 2007. The new low established after that sell off was under 72 when the dollar made a multi-month low between March and July 2008. While this is major support, there is some lesser support at 76.00. If gold is knocked down from the 1000 area again, that is where the dollar is likely to be trading when this happens.

In the long-term silver will do even better than gold. First though it has to break resistance as 16.00, which is bounced down from in the last rally and then it will head toward 21.00. Silver is both a monetary metal and an industrial metal. Economic recovery will increase demand (silver has been in a chronic shortage situation on and off for years as is). Inflationary worries will also increase demand. While silver ultimately outperforms gold, gold always moves first. Watch the yellow metal closely in the next few weeks.

NEXT: The Latest From Fantasy Land

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.

PPI and CPI - Don't Get Excited Just Yet

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:

Yesterday the PPI (producer price index) indicated that wholesale prices dropped 2.8% in October, the biggest one-month decline in the 60 years that this data series has been in existence. Today the CPI (consumer price index) report had consumer prices falling 1.0% last month, the biggest monthly drop in its 61 year history. One item alone, energy prices, made a disproportionate contribution to falling prices. Oil has dropped over 60% from its high in July and gasoline prices in the U.S. are down around 50% from their top the same month, having dropped an unprecedented 60 days in a row (with sharp decreases just before the election). This entire drop is still not fully reflected in PPI and CPI and is likely not yet over either, so expect further drops in both in the next couple of months.

Core inflation (inflation minus food and energy) painted a very different picture from the headline numbers however. PPI core rose 0.4% on the month. CPI core fell only 0.1%. There is also no year over year deflation either. Prices for finished producer goods have risen 5.2% in the last year and consumer prices are up 3.7%. At least these are the official numbers. The New York Investing meetup has demonstrated several times in its meetings how consumer price inflation is significantly understated by the U.S. government. Falling prices based on drops in commodity prices also have their limitations. While there is no maximum to commodity prices, there is a minimum which is determined by the cost of production. As this is approached, less efficient wells and mines are closed down. New projects are postponed. Supply falls so that profitable prices are maintained.

How does this compare to the deflation that took place in the early 1930s during the Great Depression? Estimates are that U.S. consumer prices fell approximately 3% in 1930, 9% in 1931 and 11% in 1932 (the bottom year). Production output was also falling by similar amounts during this period. Similar drops in prices and production took place in a number of countries. The one common denominator among these countries was a fixed-exchange rate gold standard and not the inherently inflationary fiat currency standards that now prevails throughout the world. Big increases in money supply, which are inflationary, are not sustainable under a gold standard, but can now take place in seconds by hitting the enter key on a computer keyboard. While the U.S. monetary authorities actually supported deflation by constricting the money supply at the beginning of the Depression, today they are doing everything possible to expand the money supply and create inflation.

Nevertheless, there are a large number of people who maintain that deflation is taking hold in the U.S and will only get worse over time. The crux of their argument is usually that bank credit is in collapse and the amount of bank credit available determines inflation or deflation (not rising or falling consumer prices, which is everyone else's definition) . They also frequently claim that inflation is led by rising wages and can't take hold otherwise. This was indeed true in the U.S during the 1970s, but apparently unbeknownst to these people, history began before that decade. Large inflations have existed since at least the Roman Empire and have taken many forms. As for Wiemar Germany, the one case of hyperinflation so far in an advanced industrial economy, there doesn't seem to have been any major increase in bank credit, which would be required in the deflationists world view. The government simply spent money it didn't have and had to keep printing more and more currency to keep up. For something like this to happen in the here and now, the U.S would have to be running larger and larger budget deficits and the national debt would have to be skyrocketing. Or in other words, exactly what is taking place.

NEXT: Market Must Hold In Here

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, Silver and Oil - Basics of Price Movements

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 Fed's easy money campaign that began in August 2007 started when the U.S. dollar was hoovering just above its historical low. It was inevitable that lowering interest rates at that time would weaken the dollar till it hit a new all-time low and once this happened how far the dollar would fall would not be predictable and stopping its fall would prove to be difficult. Since commodities are priced in dollars and gold and silver move opposite to the dollar, a new rally phase began for oil, gold and silver.

Price movements for oil, gold and silver usually do not take place simultaneously, but in sequence. Oil tends to move first and since it has such a strong impact on inflation, people then bid up gold because prices are rising and the U.S. dollar is falling. Gold is being purchased during this time because it is seen as a monetary substitute that will retain its value unlike paper currency. Since gold is the preferred monetary substitute, its price moves up first. When the gap becomes too big in the price between gold and silver, the price of silver, the second choice for 'real' money, then starts to rise.

The value assigned to gold and silver as monetary substitutes is minimal during periods of steady prices, but this aspect overwhelms their pricing during periods of high inflation and their value for jewelry and industrial purposes can become almost irrelevant. Nevertheless, analysts and financial 'pundits', continue to estimate reasonable prices for the precious metals as if their functional uses were the only source of their value. This approach will have worked successfully during the as much as 20 years of steady prices that precede an inflationary period, so it is continued even though a period of rising inflation has begun. During this period, gold and silver appear to become increasingly overvalued based on the exclusively non-monetary price calculations of analysts. The claims that the precious metals are overvalued become widespread and shrill in articles with charts 'proving' they are overvalued. The vested interests, such as jewelery makers, who want the prices of gold and silver to come down because high prices are affecting their profits are behind much of the news warning investors against buying 'overpriced' gold and silver.

It is highly likely if not inevitable that oil, gold, and silver will experience price bubbles once inflation starts rising. The cries that they are in a bubble will first occur years before the actual end of the bubble and it's blow off phase when prices explode upward. By the spring of 2008, claims that gold was in a bubble as it's price reached a $1000 an ounce were already being heard. Late in the spring, as oil soared way past $100 a barrel the same was being said about it. Experts on bubbles were wondering when in the decade of 2010 and 2020 these bubbles would actually end.

NEXT: Gold, Silver and Oil - Spring 2008

Daryl Montgomery

Organizer, New York Investing meetup

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