A Technical Look at Gold and Silver at the End of 2011

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

While gold and silver are in long-term secular bull markets, they have experienced price weakness in the last few months of 2011. The technical picture indicates that they are likely to remain pressured for a while longer before recovering in 2012.

GLD (the major ETF for gold)  fell below its 200-day simple moving average earlier in December and at the time, I pointed out in a previous article that this indicated lower prices in the future and it would next fall to the 325-day. After bouncing back up to the 200-day, gold did indeed fall to 148 on December 29th, which was the 325-day moving average. At the time that gold was breaking its 200-day, the DMI (directional moving indicator) also gave a sell signal on the daily charts. The RSI (relative strength index) fell below 50 and MACD (moving average convergence divergence) below the zero line -- both bearish. The sell signal on the DMI does not seem to be exhausted just yet.

The moving average picture overall still indicates that gold is in a short-term bull market. For this to turn negative, the 50-day would have to fall below the 200-day moving average and even then it shouldn't be considered as serious unless it was confirmed by a cross below the 325-day. The gives gold a lot of room to fall, even if the chart remains bullish. Even though a short rally in the beginning of 2012 is indeed possible, lower prices are likely to follow. A break of the 325-day moving average should be considered significant and would next bring GLD down to the 140 level. The 40-month simple moving average however is the most solid support below the 325-day. 

Silver shows greater weakness than gold on its charts with the selling much more advanced. Unlike gold, silver has hit new yearly lows and when this happens the first time, it is likely that a series of  new lows will then be made, although short rallies frequently take place first.  For SLV, the major silver ETF, the 50-day moving average already fell below the 200-day in October and the bearish pattern was confirmed when the 50-day then fell below the 325-day at the end of November.  On the daily charts, the DMI is on a sell signal and this seems to be only halfway done at this point. The other technical indicators are also bearish. SLV is currently being held up by support around 26. Much stronger support exists around 21 (really a band of support between 18 and 21).

The recent drops in gold and silver should be considered to be buying opportunities, although investors with a longer-term horizon should not be pushing the buy button just yet. The charts do not indicate a definitive bottom has been put in, nor that this is likely to happen in the next few weeks. Secular bull markets tend to last for around 20 years and this indicates the ultimate high for gold and silver will be around 2020. While there is always a higher high in the future during secular bulls that doesn't mean that there aren't major reversals along the way. The stock market secular bull between 1982 and 2000 had the 1987 crash, the 1989 and 1997 flash crashes, the 1990/91 bear market and the 1998 bear market. Smart investors used these declines as buying opportunities and made lots of money when they did. The same will be true for gold and silver for the rest of this decade. 

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.

Gold and Silver Plummet as Dollar Rallies on EU Woes

 

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 euro fell to a yearly low on December 14th as Italian interest rates at auction hit new highs. Collateral damage to the EU crisis is showing up not only in stock prices, but in the precious metals markets as well. 

The euro fell below the psychologically important 1.30 level in European trade and is testing support from last January. If it breaks that support (and it is pretty certain that it will), the 125 level is the next stop and 1.20 after that. The euro can be tracked through the ETF FXE. At the same time the euro is breaking down, the trade-weighted dollar has broken out. The dollar has been stuck at key resistance at 80 since September. It tested  this level both in September and in November. It traded as high as 80.67 in early morning trade. There is still strong resistance just under 82. A break above that will cause the dollar will head toward 88. The dollar can be tracked through the ETF DXY.

As the dollar rises, gold and other commodities fall. Spot gold was as low as $1562 an ounce in early New York trade. Gold plummeted after the New York open and was down as much as $68 an ounce.
Gold can be tracked through the ETF GLD. Gold decisively broke its 200-day moving average (which is very bearish) and this was the first time it has traded below this level since early 2009. The next level of support is the 65-week moving average, which is currently in the high 1400s.

While gold in general should go up during a crisis, this did not happen in the fall of 2008 -- gold was down around 30% at the time. During credit crises -- and the situation in Europe is a second global credit crisis -- it is reasonable for gold to decline. Central banks lease gold cheaply to banks and large hedge funds and they sell it on the market to raise quick cash (I have explained how this is done is some detail in my book "Inflation Investing"). This time around, there is the added danger that the IMF will sell some of its large hoard of gold to raise money for a eurozone bailout.

Gold's companion metal silver is much more volatile than the yellow metal and is influenced by the economy as well as financial market events. Silver traded as low as $28.47down $2.37 after New York trading opened. This was more than a 7% drop. Silver can be tracked through the ETF SLV. It has strong support around $26. If it breaks that, expect it to head toward the $21 level.

The EU debt crisis is not over and is likely to continue for a while longer and possibly for many more months. EU leaders have come up with one "solution" to the crisis after that has failed shortly after it was announced. Look to the markets to see whether or not their future gambits will create some viable end to their problems. So far the markets have made it very clear that the situation in Europe is continuing to deteriorate and it is dangerous to be on the long side of almost any investment except the U.S. dollar. 

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.

Gold Hits Another High as Producer Prices Rise

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.


U.S. producer prices were up 0.4% in August after rising 0.2% in July. The core rate, which excludes the items where most inflation occurs, was up only slightly. Inflation sensitive gold hit a new high on the news.

The main driver of the increase in the August PPI was energy costs. Gasoline rose 7.5% and even home heating oil was up 7.0% during the month. Both have had some price reversal since then. Food prices supposedly dropped 0.3% because of lower vegetable costs. I personally haven't noticed this, but then again I don't get to shop in the Fantasy Land supermarket like most government statisticians.

The inflation linked precious metals were both higher on the news. Spot gold rose to $1278.30 in morning trade and silver reached $20.78. Gold is likely to have another gain in 2010 and if it does, that would make it ten consecutive years of price rises for the yellow metal. Gold and silver are seasonally strong between August and March. 

The price of gold is strongly linked to the loss of value in paper currencies. While many economists refuse to admit it, this is the definition of inflation. Gold has continually risen during the last decade (in dollar terms) as the U.S. government has consistently reported low and then ultra-low inflation rates. Either gold or the government is mistaken about inflation. Gold has a 5,000 year record of accuracy. How many governments have been around that long?

Disclosure: No positions.

Daryl Montgomery
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.

Will Expanding Euro Crisis Continue to Benefit U.S. Stocks?

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 euro has fallen to levels last seen in May 2009, trading as low as 133.01. A downgrade of Portugal's sovereign debt from AA to AA- by rating agency Fitch has created new weakness for the euro zone currency, as a solution to the Greek crisis still remains elusive.  The British pound, the Swiss Franc and Swedish Krona all traded down more than a percent at one point on the news. Money continues to flow out of Europe in general, not just the euro zone. This has been going on since early December. The U.S. dollar has been the beneficiary, as have U.S. stocks.

The stock rally since last March has actually had two distinct phases, although this may not be immediately obvious by looking at the charts. Both phases are connected to actions in currencies. The U.S. trade-weighted dollar sold off between March and December 2009 and U.S. stocks rallied strongly during this period. This pattern has actually been common since the early 2000s. It makes sense because when a currency devalues, stock market caps in that currency need to rise assuming the real value of a company's assets remain unchanged. This drove the first phase of the rally. The driving force then shifted gears in December with capital fleeing Europe and looking for a home elsewhere. A lot of it wound up in dollar-based assets.

The U.S. stock market rally is not healthy however. The recent rally has been on low volume. Trading volume in the Dow Jones actually peaked last March during the market low and has generally declined since then throughout the entire rally. It's gotten even worse lately. Declining volume in a trend is a strong technical negative. The VIX, the volatility index for the S&P 500, has gotten as low as 16.17 - and this is a very low  (it reached the 90 level during the market sell off in 2008). It can go lower though and traded around 10 during the placid days of 2005 and 2006. The current investment environment is not exactly placid however. The VIX is a contrary indicator and low values are a negative for future stock prices, although it can bottom months before the market falls apart. Moreover, it is not even clear that the VIX has hit bottom.

Precious metal investors should keep in the mind that the price of gold and the euro tend to move together. This is also true of oil, but to a lesser extent. The euro has strong chart support in the 1.30 area and very strong support around 1.25, the low during the Credit Crisis. The trend indicators on the daily chart indicate a new sell off has begun, so a fall to 1.30 is very likely. If that doesn't hold, a test of 1.25 will take place. If the 1.25 level breaks, investors should assume that another major crisis is unfolding in the global financial system and that it could be as bad as the one that occurred in the fall of 2008.

Disclosure: None

NEXT: CFTC's March 25th Hearings on the Metal Markets

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.

Investing Themes for the Next Decade: 2010 to 2020

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.

Investors make the most consistent money by following bigger trends and going long in uptrends or shorting into downtrends. Longer term trends are not unidirectional however, but subject to either sharp or intermediate term reversals. At those points, it is best to get out of the market until the uptrend or downtrend resumes. Of course all trends eventually come to an end and it is important to recognize this when it happens and to close out your positions. Failing to protect profits is perhaps the biggest mistake that investors make. While it is not possible to predict the future with complete accuracy, it is possible to make some useful projections that can be used as a general investing guide for the next decade.

The way to see into the future is to look into the past. Human behavior hasn't changed in the last many thousands of years and this is what is mostly responsible for repeating market boom and bust cycles. History has shown that government leaders in particular are prone to making the same monetary and fiscal errors over and over again. People who run governments have a tendency toward megalomania and a belief that things that happened consistently in the past (assuming that they are even aware of them) because of certain financial policy actions won't happen again in the present. They are invariably wrong. Central bankers can and do evidence this behavior to an extreme. They have repeatedly claimed that they have the ability to control the economy. The Credit Crisis makes it very clear that they do not - otherwise it would not have happened. Real world events have not shaken their faith in their own omnipotence however. Their arrogance combined with denial indicates that workable solutions to the Credit Crisis are many years off and only likely to take place once extreme conditions have been reached.

Repeating cycles and the historically oft repeated government responses to them provide us with a lot of information about what can happen in the markets during the next ten years. Just like everything else, the cycles will behave as they have in the past because the fundamental driving forces behind them are the same as they always have been. Before the decade even begins, we can clearly see three major factors that will impact the market until at least 2012. These are: the lag between monetary stimulus and inflation, the steep yield curve, and price cycles in certain commodities. These predict that a peak in the inflation rate, long-term interest rates and commodities prices is probable between December 2012 and July 2013. This will not be the ultimate peak however. There will be at least one additional peak that follows this one and two extra peaks are even more likely.

The exact high for commodity prices and interest rates of course can't be stated yet. It can be said however that they will be much higher than the beginning of the decade and be at levels that would currently be considered extremely high by most investors. Sharp price acceleration is likely to be evidenced in the last several weeks to few months of the move with as much as 20% to 25% gains for commodities such as gold and oil possible during this end phase. While an inflation investing strategy centered around precious metals, energy, agricultural commodities and shorting long-term bonds will be highly profitable up to early 2013, investors will then need to sell these holdings to protect their profits. Either switching to cash or engaging in a deflationary investing strategy will then become the best option, at least for a while.

This first inflation peak will end because it will become politically untenable for governments to allow it to go on. Investors should expect the typical government responses from the past. These include price and wage controls, currency intervention and cross border currency controls, import/export controls, rationing, punitive taxation policy on certain investments, changes in investing rules and regulations and either indirect or direct government forced dissolution of certain investment vehicles. As has happened in the past, these policy initiatives will work quite well - in creating shortages, black markets, general disrespect for the law, and in preventing the economy from fixing itself. Inflation will remain controlled for approximately 18 months at most. At that point, there will either be a de facto or de jure dissolution of many of the policy initiatives because of lack of support among businesses and the public. By 2015, inflation will on the rise again and investors will need to switch back to precious metals, energy, agricultural commodities and shorting long-term bonds.

Some ultimate resolution to rising prices will likely take place toward the end of the decade between the 2017 and 2019 time frame. Prices for most commodities will reach levels that would be considered unimaginable in 2009. U.S. interest rates will be somewhere well into the double digits (if not higher) and the U.S. dollar will have lost most of its value. By that point, the world financial system will have to be restructured. The dollar will have to be given some backing to regain credibility. There will probably only exist a narrow window of time for inflation investors to sell their holdings so that they keep most of their spectacular profits. They must then switch their investing strategies to approaches that work in a disinflationary or deflationary environment. For an update on how to do this, check back in 2020.

Disclosure: Long precious metals, agricultural commodities, short long-term bonds.

Next: Energy Investing Guide for 2010

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.

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.

Our Video Related to this Blog:

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.

Silver Breaks Out of Trading Range

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.

Our Video Related to this Blog:

Precious metals had a spectacular rally on Monday. While spot gold was up 1.9% on the day and hit another all time high at $1140.80, spot silver and palladium were the stars, rising 5.6% and 5.7% respectively (platinum was up 4.2%). At more than one point silver was up over a dollar and ended trading at 5:15PM New York time up 98 cents to close at $18.42. Silver has been stuck in a trading range between $16 and $18 since September and this was the first decisive break and first close above that range. Trading volume on the EFT SLV was approximately double normal levels and was highly supportive of the move up.

Now that silver has made its move higher, the spot price needs to stay above $17.70 (the low for the day) to maintain the breakout. The reason silver was stuck at the $16 to $18 level was because of a band of resistance at those prices established in March to July 2008. There is a further resistance point around $19.00 that still needs to be taken out. After that, a test of the 2008 high just under $21 will be possible. Some more consolidation should be expected around those levels and this is likely to take place in December. Silver and gold are seasonally strong in the early part of the year though and tend to form intermediate tops in March or April, so a move to the $25 area, long-term resistance from the late 1970s, is a target price for silver next spring.

As the precious metals continue to rise, you will hear more and more talk about a bubble. Ignore it. One well-known market guru said gold was in a bubble just yesterday. While gold and silver will eventually be in a bubble, this is a long way off. They are in bull markets. The two should not be confused. The simplest way to distinguish the two is by the price patterns and extent of the rallies. Bubbles have spectacular price rises that have been preceded by long multi-year continual rallies. Silver had a price collapse from almost $21 to under $9 in 2008. It is rallying up from the bottom. This is not a bubble pattern. Gold is up 53% off of its bottom from last year. When it was in a bubble at the end of the 1970s, it went up 400% the last year. Silver was up 1000%. When you see price rises like those in a single year, that is when you need to worry about a bubble. Until then, the trend is your friend.

The other nonsense floating around the media concerning the precious metals is they are not at inflation-adjusted highs and this is somehow a negative. Is it really? The same could have been said about U.S. stocks in the 1980s. Stocks had a major rally from those levels until they reached their inflation adjusted highs in the 1990s. Then, stocks had an even bigger rally after they reached this level. When an asset isn't trading at its inflation-adjusted high, this is a reason to invest in it because it means big profits can be made. Gold and silver have been reminding us of this almost every day lately.

Disclosure: Long gold and silver.

NEXT: U.S. Inflation Reports - Contradictions and Absurdity

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 Makes History

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, gold finally broke its intraday high of $1033.90 set in March 2008. Not only did it break it, but it closed above it. The COMEX close was $1039.70 and at 4:00PM New York time gold was trading at $1042.70. The breakout was text book perfect - a gap out of a long base to all time highs on high volume. The technical indicators were extremely bullish as well with the RSI above 50 and rising after having bounced off 50; the MACD above zero after having just made a positive cross and the DMI trend line announcing a new up move (see a daily chart of the major gold ETF GLD as a reference)

Yesterday's move in gold will be mentioned in financial history books well into the future. It will be seen as a significant turning point announcing a long period of inflation and the early phase of a huge bull market in gold and silver. There are analogies to the Dow breaking above the 1,000 level in 1982 and rallying over 10 times in the following 18 years. Gold may indeed rally that much and possibly considerably more, but it is not likely to take nearly as long. For those who have not been following the blog, the New York Investing meetup first recommended gold at $740 in September 2007 and we recommended selling it at $1000 in March 2008. We then recommended buying gold again when it fell back to $740 (gold traded as low as the very high $600s). We did not recommend selling gold again last spring when gold hit a $1000 again with the idea that the following drop would be considerably less this time. This trade did indeed remain continually profitable. We have been anticipating the current breakout for the last few months and telling people to position their portfolios for it.

What should investors do now assuming you already have your full positions in precious metals and their miners? You can consider taking profits some time around next March. Gold tends to peak in the spring. However, the peak this time may be either shallow or short. It is possible that this gold rally will last for around the time length of the base, which is 18 months. This would mean a significant peak could take place around March 2011. So if you sell gold in March 2010, you may have to be nimble about buying it back. It is likely that it will be worthwhile taking some profits in precious metals and buying oil with them some time early next year, so keep this trade in mind.

As for price points, there are two areas of significant resistance on the upside. The first is in the $1300 area and the next one in the $1600 area. If gold is selling at one of these points by next March, that's the time to sell some of your holdings. The $1300 resistance comes from the top line of a channel that gold prices are moving in. Some forecasters have this number below $1300 at the moment while others have it as high as $1370. This number continually moves up over time and it will be much higher next March. You can also project a rally move as being at least the depth of the base, which is around $340. Add this to $1034 and you get about $1370. However, this is likely to be much too conservative in this case. The base for gold is quite long and should be good for a rally that is at least double the depth of the base. This would take gold to around $1700. There is also a Fibonacci extension at $1673. Some pause will be needed around $1300 before gold can move up to this higher target. If gold can get to the $1300 area by the end of this year, the $1600 area is a highly likely by next March.

As for a high in 2011, this could be anywhere between $2,000 and $2,600. We will revisit this in the future. New York Investing meetup's long term projection for the peak price of gold is between $5,000 and $10,000 (we made this in March 2008) and this assumes that hyperinflation will not take place... not necessarily a good assumption any longer. We do not currently anticipate a high for precious metals until around 2017, so there will lots of profitable opportunity in these assets for many years to come.

The New York Investing meetup will be having a class on Commodity Investing at PS 41, 116 West 11th Street (at 6th Avenue) on Thursday, October 8th. I will be reviewing the gold and silver markets at the beginning. The class will run from 6:45PM to 8:45PM. If you haven't preregistered just show up and you can register and pay at the door ($20) Please see our website for more details (http://investing.meetup.com/21).

NEXT: Desperation Time for 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.

Precious Metals 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 Fed and G20 meetings from last week both had a consensus that government generated stimulus of the U.S. and global economies should continue. The U.S. and UK and are printing substantial amounts of new money in order to engage in this stimulus. This should have been bearish for the dollar and pound and bullish for the precious metals. While the pound did indeed slide, the dollar went up and precious metals went down. These counter intuitive market reactions, common since the beginning of the Credit Crisis, should end soon.

Spot gold fell as low as $987 in overnight trading. Spot silver was as low as $15.73. The U.S. trade-weighted dollar traded between 77.12 and 77.26 on Friday. It was trading at 76.87 around the opening today. After hitting a yearly low of 75.83 four days ago, the dollar bounced of its support at 76.00. It is trying to head toward 78.00, where it has strong resistance from its 50-day moving average. Stronger resistance is just above that at 78.33, the low from the dollar sell off in the late 1980s and early 1990s.

The Fed reiterated in its post-meeting statement that it "expects that inflation will remain subdued for some time." The mainstream media is filled with commentary about how inflation isn't a problem. Comments like "many economists argue that inflation is only an issue when the economy is humming along" are common. Someone should have told Zimbabwe with its 94% unemployment rate (if that economy was humming, it was tone deaf) that it was impossible that it was having sextillion percent inflation. When discussing all the money printing the U.S. Fed is doing, media articles invariably state that it "isn't so clear whether this will create an inflation headache down the road for the Fed". No article has yet to cite one case in the entire economic history of the world where excess money creation didn't lead to major inflation. Somehow by magic it might not happen in the contemporary U.S. though. Indeed magic is the operative word because that it the only thing that will prevent inflation going forward.

The idea that too much currency creation leads to price rises is not new. The 'quantity theory of money' originated with Copernicus, better known for his 'earth revolves around the sun' theory, in the early 1500s. It was further developed in the following centuries by at least half a dozen other economic thinkers long before Milton Friedman repackaged it as a new idea and won a noble prize for his 'original' thinking. Governments always claim that printing too much money isn't a problem and the lesson that it is needs to be learned over and over and over again. Buying gold and silver has always been the protection from excess government money creation. Smart investors only need to learn this lesson once.

NEXT: The Longer Term U.S. Interest Rate Picture

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.

IMF Selling Gold to Dampen Rally

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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Like clockwork, the IMF gold sale has reared its ugly head again as has occurred during a number of previous gold rallies since 2007. This time the IMF is actually selling the gold. It only threatened to do so the previous six times or so. It says it is looking for a central bank buyer. For some time, rumors have claimed that the central bank buyer will be China and these resurfaced again last week before the IMF announcement. China is playing coy however and says it wants the gold at a discount to the current $1000 price. Other possible buyers include Russia, the Gulf Oil States, Japan and India, all of whom have relatively low gold holdings and too many U.S. dollars.

The IMF is selling one-eight of its claimed gold holdings (the IMF is not audited, nor will it answer questions about whether its gold is held in individual contributing countries and being double counted as part of their gold reserves) or 403 metric tons. While this sounds like a lot, its is less than $13 billion at current prices. China alone has approximately 2000 billion dollars in reserves held in foreign currencies, almost half of which are in U.S. dollars. China's current gold holdings are 1054 metric tons, up from 400 metric tons in 2003. So it has less than $33 billion in gold versus almost 1000 billion in U.S. dollars. It is thought that the gold sale is being used as a way to let China get rid of some its U.S. dollars without dumping them on the open market.

There is also a two-day Fed meeting this week on Tuesday and Wednesday and a G20 meeting this Thursday. Since the Credit Crisis began two years ago, the U.S. dollar has rallied from just before the Fed meeting to just after (gold falls in response). This has happened no matter how much the Fed has announced it is debasing the currency. No one in their right mind would buy dollars under such circumstances, which leads to the obvious conclusion that global monetary authorities are acting in concert at these times to hold the dollar up. Expect this again this week. As mentioned in this blog on Friday, the dollar is too extended from its 50-day moving average and will try to rally back to that point.

Gold has traded as low as $996 this morning and the trade-weight dollar is at 76.97 at the moment (still below its 78.33 break down level). Expect general weakness in gold and the other precious metals and strength in the dollar until Thursday. A reversal for both after that is highly likely. Keep an eye out for buying opportunities, particularly in the mining stocks.

NEXT: Manipulation Fails, Gold Rallies Back

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.

Quadruple Witching Today; 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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Once every three months there is a quadruple witching day. This is when market index futures, market index options, stock options, and stock futures all expire on the same day. Volatility can result, but that is more likely to take place a few days before. In general, prices will move to minimize the profits of the buyers of most outstanding options. Reversals of price movements can take place the following week or two and you need to watch out for these.

The trade-weighted U.S. dollar is the key to many market movements currently. It has been selling off as U.S. stocks have rallied since March. A dollar rally should cause market weakness at this point. This dollar/stock relationship is abnormal and would make much more sense for gold. The dollar/gold relationship has actually been much weaker than might be expected. The trade-weighted dollar ETF DXY traded as low as 76.01 yesterday. There is chart support at this level, since there is a sharp low at 75.89 that was made almost exactly one year ago from today. Any break of last years low could cause the dollar to test its all time low of 71.50. A short term rally might be in the offering first however because the dollar is well below its falling 50-day moving average and it tends to move back toward that line when it gets too extended.

A dollar rise could affect both stocks and gold. Spot gold closed at $1013.30 yesterday, its fifth day above the key breakout point of $1004. Gold has made three all time closing highs in the last 5 trading days and this is very bullish. It still needs to break the $1033 intraday high before a longer term rise to the $1200/$1300 area is possible. Gold stocks have been selling off the last two days and may be volatile for several more. Large drops should be considered buying opportunities. Look for gaps to be touched or filled. The most profitable buying is done either on major breakouts or at bottoms (buying after a long run up is a good way to lose your money). Gold is at the cusp of a major breakout.

The current bottoms in the inflation trade are in natural gas, food commodities and possibly long-term interest rates. Buying natural gas on any day with a big drop looks like a good strategy. Food commodities have been trading around their lows since last December, which is a long time. The chart for RJA is quite bullish and it looks like it wants to rally soon. I have started buying it. The food related ETFs are generally much less volatile than precious metal and energy ETFs, so you are not likely to make money as quickly from them. Long term interest rates bottomed last December,with the 10-year bond hitting 2%. The 10-year rate was around 4% in June. Since then, long-term rates have declined. TBT, the leveraged short ETF for bonds of 20+ years duration has sold off a third since June. I have started slowly accumulating it. Long-term rates may not have bottomed just yet, but they are likely to be going much, much higher in the future.

NEXT: IMF Selling Gold to Dampen Rally

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 Inflation Trade

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 had another record close yesterday, the third one in four days. The near term futures contract closed at $1018.90 and was as high as $1023.30 intraday. The breakout level is $1004 and above. Gold still needs to take out its all-time intraday high of $1033. Silver closed at $17.33 and traded as high as $17.50. The New York Investing meetup mentioned gold was a good buy at $740 and silver in the the $9 to $10 range. We have also discussed in our meeting the ETF's DGP and AGQ that are 100% leveraged and move twice as much up and down as gold and silver do. These highly volatile ETFs are not appropriate for risk-adverse investors. For those who want to broaden their investments to include gold and silver miners , we proposed the ETF GDX. Our favorite gold stock is NovaGold (NG) which was first mentioned in this blog when it was just above $3.

The precious metals are going up for the same reason as global stock markets. Governments throughout the world are pumping massive amounts of liquidity into the financial system. This shows up in stock prices first and in consumer inflation later (it can take many years before the full impact is felt). The statistics indicating economic 'recovery' are usually not adjusted for inflation and what is being touted as economic growth by the mainstream media has a significant component of rising prices to it. This is only the beginning however. In a few years inflation is going to get incredibly ugly. When it becomes apparent that there is no 'real' growth, the stock market rally will fizzle - and the government will print even more money to stimulate the economy. The stock market is currently historically overbought based on some criteria. Over 90% of stocks on the NYSE are trading above their 200 day moving averages. A number in the 70% range is usually enough for a top.

Gold and silver are the ultimate protections against inflation and anyone concerned about inflation should make them the cornerstone of their investing strategy. I will hold as much as 50% of my portfolio in these metals and their miners during their bullish periods. The other two major inflation hedges are energy and agricultural commodities. Oil is seasonally weak in the fall and usually best bought early in the year and sold in the summer (as the New York Investing meetup did with DXO). Its seasonal pattern is almost the exact opposite of gold and silver's. Natural gas is the energy commodity of choice at the moment since it is seasonally strong in the fall. Agricultural commodities are dependent on weather as well as inflation. Good weather during the U.S. summer has driven many of their prices to very low levels. It might be worth taking a look at RJA or DBA (RJA is more diversified) and start putting a little of them away for a non-rainy day.

The other inflation trades include industrial metals and shorting long-term U.S. bonds. The New York Investing meetup mentioned FCX in the winter and Alcoa (AA), UYM and XME in the spring (as well as Harry Winston - HWD). These stocks have already had major rallies. They are partially dependent on inflation and partially dependent on the economy doing well going forward, so they are not the major bargains they once were. The short bond trade did well between December and June (bond prices went down and interest rates went up), but there has been some give back during the summer. TBT is a leveraged ETF that allows the average investor to short long-term bonds. When the economy heats up, interest rates go up. During bouts of inflation interest rates go through the roof. TBT works if either or both take place and it is currently at a reasonable price.

NEXT: Quadruple Witching Today; Market Update

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.

Precious Metals Becoming More Precious

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 had another all-time closing high yesterday in New York, the second in three days. It is trying to rally to an all-time intraday high and complete its long awaited breakout. Gold traded as high as $1020 in the overnight markets. The all-time intraday high, also hit in the overnight markets, is $1033. There is gold's third time trading in the over $1000 area (and there were two more times close to $1000) in the last 18 months. Unlike the first two times, which were sharp spikes up, this time gold has stayed in the $1000 area for several days. The other two times were also in February and March, times when gold tends to peak for the year. This time gold is hitting $1000 at the beginning of its seasonally strong period. The gold charts are extremely bullish looking and gold has put in an 18-month base. Conditions for a strong , powerful breakout look good.

Gold leads the precious metals. The other precious metals are not even near their all-time highs, although silver is much closer than platinum or palladium. All three have industrial uses. Silver is the only one of the three with a history of monetary use. Silver already became overbought on the daily charts in early September and has continued to go up since then. It was as high as $17.33 overnight. Gold has not yet become overbought on the dailies. In strong rallies a stock or commodity will get overbought and stay overbought for months.

While the precious metals are rallying, the U.S. trade-weighted dollar is slowly crumbling. As of this writing, it is trading at 76.38, but has been as low as 76.19. The yearly low is 75.89 and this was hit 11 months and 3 weeks ago. A new yearly low could be hit at any time from today onward. There are a lot of traders that automatically short yearly lows and this is seen as technical weakness. The U.S. dollar has already hit multiple yearly lows against the euro in the last several days.

Buying into a gold rally is a lot better deal than buying into the current stock rally. The gold charts are technically very strong, while the stock index charts have shown a great deal of weakness, yet the rally somehow continues. The premise behind the stock rally, the reviving economy, is also false. The premise behind the gold rally, rising inflation, is quite solid however. Both rallies are fueled by the money printing quantitative easing that the U.S. Fed is engaging in. This has always caused inflation in the past and gold is telling us this is happening again.

A correction to yesterday's blog: the ticker symbol for the natural gas ETF mentioned is HZBBF.

NEXT: The Inflation Trade

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 Breaks $1000!

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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As of this morning, gold has been above $1000 an ounce three times. The first time was in March 2008 when it reached $1033 and the second was February 20th of this year when gold reached $1006. Slightly after 4 AM New York time, gold traded at $1007. Gold also traded close to the $1000 mark in July 2008 and early this June. Unlike previous attempts to break the $1000 an ounce level, this one is taking place at the beginning of gold's bullish seasonal period that runs from August to February.

Gold has had a spectacular rise that began only last Tuesday. Most of the technical indicators on both the daily and weekly charts are not even remotely overbought. The technical patterns look more like a pre-rally. They have not even reached the usual rally formations yet. Until they do, choppy trading around the strong resistance level of $1000 is quite likely. A break higher now is possible, but is not likely to last too long initially. A rally will take hold after awhile however. Gold now has a long 18-month base and that can act as a springboard for a long and powerful breakout that can last for several months.

Silver was as high as 16.80 this morning and is trading at a yearly high. It is trading in a band of resistance between 16 and 19. It may get stuck in this area for awhile as well. Once it clears the 19 area it is likely to go to new highs breaking through the 21 level reached in March 2008. Silver always follows gold.

As would be expected the U.S. dollar is not doing well this morning. DXY, the ETF for the trade-weighted dollar, traded as low as 77.14 pre-market. This is a new low for the sell off that began in March and well below the breakdown level of 78.33. This is the third time this level has been breached. The dollar is weak and the precious metals are strong because the G20 made a pledge this weekend to keep their unprecedented stimulus efforts going. Stocks are rallying as well, not reflecting any potential growth in the global economy as the mainstream media is reporting, but because more liquidity rallies stocks. If it is interpreted as inflationary, it also causes gold and silver to rally and the U.S. dollar to tank. The market's message today is quite clear.

NEXT: Inflation Versus Recession

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.

A Golden Opportunity with a Silver Lining

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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In the current uncertain environment there are only three things that we know will take place - death, taxes, and that the U.S. Treasury will continue to flood the financial system with newly 'printed' money. While the first two are unabashedly negative, the third can be a golden opportunity with a silver lining. The ability to borrow the money needed to pay for the all the bailouts the government is engaging in never existed. The U.S. reliance on foreign sources to fund its operations was already stretched to the limit when the budget deficit was $400 billion, so printing money is the only way to fund the current year's budget deficit which is approaching $1750 billion. Even worse, news out of China indicates that the foreign money that the U.S. has previously tapped can no longer be relied on. In the last few days the markets seem to finally be grasping this situation with traders dumping U.S. government debt and the dollar and buying up gold and silver.

As long predicted in this blog, China has been selling its U.S. debt. It is not yet dumping it wholesale however (just wait, that day will come), but is rotating out of more risky to less risky paper. China sold a large amount of agency debt (Fannie Mae and Freddie Mac) and it looks like the U.S. Fed bought it. Certainly no one else in their right mind would have done so.If you go back and look at the Fed's first announcement on quantitative easing, you will see that one of the major purchases for the newly printed money was Fannie Mae and Freddie Mac bonds. China has also finally admitted it is worried about inflation in the U.S. and has been buying shorter term paper and avoiding longer term bonds.

The China news was of course negative for the U.S. dollar, but it is by no means the only thing pressuring the currency. A return to normal operating conditions for the global financial system (see comments on the TED Spread in yesterday's blog) is highly dollar negative The dollar has been kept up for the last many months because of its safe haven appeal and as conditions improve outside the U.S., particularly in developing economies, that appeal is waning rapidly. Foreign traders dump U.S. treasuries and repatriate their money under such circumstances. Indeed, long term treasuries broke above the key 3.25% resistance this week (when traders sell bonds the interest rate goes up) as the dollar has sold off against almost every currency. Overnight even the British pound had a major rally against the dollar. Talk about embarrassing!

The inevitable corollary of a falling dollar is rising gold and silver prices. Gold hit a two-month high yesterday, closing above 951. It is on the verge of a major breakout. Silver traded above major resistance at 14.50 during the day and it is only a matter of time before it closes above this key level. Figures released today show the demand for gold bars and coins was up 396% in the fourth quarter of 2008. The spectacular rise of 223% for gold purchases from ETFs seems small in comparison. None of this activity is taking place because Wall Street analysts and other mainstream 'experts' have been telling people to buy precious metals. And don't expect to be hearing about the opportunity from them either while there is still a lot of money to be made. They are usually the last to know about such things.

NEXT: North Korea, OPEC and Precious Metals

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.

What We Learned From the First Trading Day of 2009

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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January 2nd was a good year for the markets throughout the world. Volume was low however since many traders took a four day weekend and this almost certainly reduced selling. While we can't look at the results as a complete picture, the first day does provide us with a good sense of what people are buying. While this is very useful information, you need to make sure selling pressure isn't overwhelming the buying interest. Under such circumstances, the areas of the market that were doing the best and worst are most likely to provide useful information.

All the U.S. indices rallied on Friday. The Nasdaq led the way, rising 55.18 points or 3.4%. The S&P was just slightly behind, going up 28.55 points or 3.1%. The Dow with its 258.30 rally was up 2.9%. Noticeably lagging were small cap stocks. The Russell 2000 rose only 6.39 points or 1.2%. Trading volume on the Dow was well below average. Nasdaq volume was low. Low volume was also seen in GLD, which was down slightly on the day. SLV which was slightly up, rose on somewhat above average volume. OIL though won the prize going up 8% on volume that was well above average.

Examining purchasing in individuals stocks, Energy related stocks had the highest percentage of buying interest by far of all industry groups. They were followed by Metals/Steel, Machinery,
Mining, and Aerospace stocks. The list of stocks that investors were scooping up could be best summed up as commodity related and infrastructure plays (the Obama administration is working on a one trillion dollar spending package which will benefit these companies).

And what stocks did investors shun like the plague? At the very top of that list was Savings and Loans. Office products were in essentially just as bad shape. Slightly better were Banks, Semiconductors, Insurance, and Computer Hardware in that order. The industries most lacking in buying interest could best be summed up as financial and those that produce products that are used for business operations - or perhaps, those that are part of the Credit Crisis and those most impacted by recession.

NEXT: Sellers Return for Second Day of Trading

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 Mega Move Up in 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. 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 posting:

It looks likes gold and silver had their biggest one day move up in history, both in absolute and percentage terms, on Wednesday . The price run up looks even bigger than the one that took place the day the previous commodities bubble peaked in 1980. The underlying picture between then and now is quite different however. While the move in 1980 indicated the end of a major rally, the move yesterday indicates the beginning of a new one.

In 1979 and into the beginning of 1980, gold and silver prices were going straight up in what is termed a blow off top. A huge move up, similar to what took place yesterday, ended the rally and the secular bull market that had been in place for the previous decade. What had preceded yesterday's rally was six months of selling for gold and silver, not buying. From high to low, gold was down 29% and silver 52%. Both had hit major areas of support - 738 for gold and 10 to 11 for silver. Gold then moved up 11.3% (or $90) and silver moved up 14.4% (or about $1.50) from the previous day. The gold miners index, the GDX was up 11.7%. These moves took place on high volume, more than triple the average for the GLD ETF and more than double for the SLV ETF, confirming the bullish picture.

The bullishness was furthermore limited to gold, silver and to a lesser extent oil (up 6.6%) and food commodities (up about 3%) . It was not part of an overall commodities rally, copper was actually down on the day, nor even a precious metals rally. Platinum was up 1.7% and palladium up only 0.5%. This rally was massive short-covering linked to increased inflation expectations and pessimism about the future of the U.S. dollar. The trade-weighted dollar fell 1.4% - a huge one-day move for a major currency. The hyper response of gold and silver to this drop indicates that much of the previous selling had been short selling and not traders dumping their positions as has been repeatedly reported in the media.

While panic buying was hitting the gold and silver market, panic selling was taking place in stocks. All of the major U.S. indices almost hit the mini-crash level of down 5%. Nasdaq came closest with a 4.9% drop on volume 50% greater than average. The Dow had a lesser drop at 4.1%, but it took place on double average volume. The S&P was down 4.7%. Since August 2007, whenever the U.S. stock market has started falling apart, the Fed has come in with some sort of major liquidity injection to prop it up. By last night one of the biggest liquidity injections ever, involving most of the world's major central banks, had been arranged. What a surprise!

NEXT: Central Bank Liquidity Tsunami Returns

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.