Gold Rally Fails: Will a Big Drop be Next?

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.


On May 11th, gold closed at a new all-time high above $1200. I was at the Hard Assets Conference in New York that day and I was probably the only person in attendance that was not enthusiastic about the yellow metals short-term investment potential.  Now, only nine days later, it looks like the breakout has failed.

GLD, the largest Gold ETF, had reached a high around $120 in early December of last year. So far in this recent breakout it traded up to only $122.23. GLD closed at $116.63 yesterday, convincingly dropping below the high from late last year.  GLD is now likely to test its 50-day moving average, which is currently a little below $113 and rising. So far, there is no serious damage on the technical indicators, but this could take place in short order as occurred with stocks before the crash on May 6th.

When trying to determine what gold is going to do, it is a good idea to look at mining stocks. These almost always lead the metal both on the way up and the way down. Interestingly, GDX, the gold and silver ETF for the major mining companies, failed to make a new high and break out in the days around May 11th. This non-confirmation was disturbing at the time and is even more disturbing now. GDX almost touched its 50-day moving average in the almost $30 drop in gold prices yesterday. The more volatile GDXJ, the junior miners ETF, convincingly sliced through its 50-day and closed well below it. The technical indicators on GDXJ are starting to look quite sickly. The juniors are clearly breaking down and it makes sense that they should lead the way for the complex. If so, bullion itself could be in a lot of trouble soon.

Investors should remember that gold sold off substantially in the fall of 2008, although not nearly as much as most stocks or other metals. Junior mining stocks were as devastated as the financials and had some of the biggest drops of all. If we are entering into another global financial crisis, gold may once again fail to live up to its safe haven reputation. This situation can arise once again because the central banks cheaply lease their gold to the big banks and hedge funds. When the trading houses are desperate for cash because they are having difficulty selling their assets, they can lease gold and sell in on the open market immediately. This sudden supply being dumped on the market overwhelms safe haven buying and suppresses gold prices. If we have begun global Credit Crisis #2 because of the problems with the euro, investors will once again have access to bargain priced gold.  It's at that point that investors should stock up.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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

Markets Enter Danger Zone

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

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Almost all markets are at critical points right now. The 50-day moving averages have been broken in all the major stock indices, except for the Dow. SLV has also broken its 50-day. Gold is holding above its 50-day and hit key support at $1025 earlier. There is about a $5 gap under that level that could be filled. The RSI picture is highly negative as well. All major stock indices have broken the key 50 level, as have SLV and GLD. Long term interest rates have not only started heading up, but are trying to break a 29-year downtrend line (this would mean a many year period of rising rates). The only thing that is rallying is the U.S. trade-weighted dollar. It bounced off of the 75 level - a place where there is no technical support. The dollar rally has mostly been orchestrated by the European Central Bank, which is desperately trying to keep the euro under 1.50.

The 3rd quarter U.S. GDP figures are out this Thursday. Consensus is for a 3.2% rise. A much lower number could tank stocks. A larger number would be bullish. Regardless of what happens, the false message of economic recovery that has been repeated continually by the U.S. government will be shown up to be the fantasy that it is at some point and the pretense that the stock market rally has been based on will evaporate. It will soon become obvious though that the only way for the U.S. government to handle our ongoing economic problems will be to print more money... and more money .... and more money. At that point, stocks and the inflation trade (precious metal, energy, and agriculture) will decouple. These have been mostly moving together since March. As of now, it is not possible to say when this separation will take place.

At the moment, it is necessary to worry about everything going down. Gold and silver miners have been particularly hard hit, with small cap stocks next on the list. Some mining stocks had two and sometimes three gaps on their charts, with only one gap having been filled so far. Watch out for prices returning to levels where there is a gap. Miners are affected by the price movement of gold and by the overall stock market, so they are getting a double whammy right now. These are also highly volatile stocks prone to sharp drops and rallies. You need to buy on the dips and either hold on or sell every time there is a peak.

The struggle between the U.S. dollar and the markets is likely to continue for some time. The stock market is essentially a house of cards that can start to wobble even with a small dollar rally. A sharp drop in stocks will invariably be met by a new flood of liquidity from the Fed., which will in turn make the dollar go back down. The Fed learned that this was necessary based on last fall's market meltdown and will now repeat this action every time there is a threat to the markets. Any sharp drop will therefore likely be followed by a sharp rise. This is typical of secular bear markets. Over many years they go up and down a lot, but ultimately get nowhere. The Dow was 10,000 in 1999 and is around 10,000 right now. Gold on the other was around $250 in 1999 and is over $1000 right now. The long term trends determine where the money can be made.

NEXT: Mark to Model GDP

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.

Interest Rates Break Out

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:

Almost everything went down last Friday, everything except the U.S. dollar of course. Continuing the pattern that has been very noticeable since this March, stocks and commodities both retreated as the dollar went up. Looking back at a 10-year chart, you will notice that the stock market and the U.S. dollar used to move together. Somewhere between 2003 and 2005, the pattern changed and they started moving in opposite directions. The pattern actually only became more exaggerated this spring. 2003 was when the Fed lowered interest rates to one percent, which in turn made the real estate bubble take off.

Liquidity is driving this pattern. Liquidity has also made it possible for interest rates to remain low during the last several years. During 2009 however bond prices have only been kept high because the Fed is buying a boatload of treasuries with freshly printed money (note: interest rates go down when bond prices go up and vice versa) while keeping overnight rates around zero. While the Fed has extended its purchase of Agency debt (mostly Fannie Mae and Freddie Mac) until March 31st, it is supposed to stop its quantitative easing program for treasuries on Oct 31st. It remains to be seen how long they will be able to stay out of the bond market. My guess is the printing presses will not remain idle for too long.

Bonds also sold off on Friday. Interest rates bottomed last December, with rates for the 10-year bond falling to around 2.00% and on the 30-year bond to 2.50%. By June, interest rates had approximately doubled to 4.00% and 5.00% respectively. Bonds rallied since then (and interest rates came down). Early this month both the 10-year and 30-year interest rates (not prices) bounced off their respective 200-day moving averages. This was the buy point, although some market watchers claim that 3.48% and 4.30% are the key rates that need to be broken for the 10 and 30-year bonds to be shorted. The 10-year yield closed at 3.48% and the 30-year at 4.29% on Friday, but were at 3.52% and 4.32% this morning - both above their key resistance. To see the interest rates charts on Big Charts (http://www.bigcharts.com/) use $TNX and $TNY for the ticker symbols.

I have already been buying TBT, the 200% leveraged short 20 to 30 year bonds ETF, for awhile now. This has a place at the moment in inflation sensitive portfolios, but should not be a huge position. Silver is my biggest holding and its strength on Friday was impressive. Almost by itself silver managed to buck the selling tide and punch higher. Gold is my next largest holding and I have 200% long silver and 200% long gold in an approximately 60/40 ratio. Mining stocks and the ETF GDX are next. I am trying to move agricultural commodities to become my 4th largest positions and hope to accumulate more GRU on a sell off this week (I already have all the RJA I wish to hold). TBT may wind up in the 6th or 7th place. All of this is likely to change early next year, when I anticipate exchanging a certain amount of my precious metals holdings for oil positions and other portfolio revisions will need to be made.

NEXT: Central Banks Support 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.

Market Sells Off as Dollar Rallies...As Usual

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 U.S. dollar is rallying today for a change. Yesterday DXY, the ETF that represents it, fell as low as 75.83, below key support at 76.00. As of this moment DXY is 76.73. There is strong resistance at 78.00. The key breakdown level is 78.33, which was the multi year low made during the dollar sell off in the late 1980s and early 1990s. For the last two years the U.S. dollar has usually illogically rallied the day after the Fed meeting. There is also danger that some statement will come out of today's G20 meeting about the desire for a stronger dollar. If this happens, the talk is unlikely to be met with any action.

Gold was strong first thing in the morning, but sank to below a $1000 as trading progressed. Silver was selling off even more and may have resolved its overbought condition. The key breakout level for gold is $1003.50. It has closed above this level eight days in a row. So far, it doesn't look like today will be the ninth.

A number of gold and silver stocks have gaps made approximately ten trading days ago. These gaps may have to be filled. Nova Gold (NG) filled this gap four days ago. It was trying to test it today. It is not unusual for a stock's price to fall somewhat below the bottom of a gap. This is frequently a very profitable buy point. Nova Gold has made a cup and looks like it is making a handle. Many gold and silver miners' charts have similar patterns.

About the only thing up in today's market is UNG. The Natural Gas report seemed bearish this morning. GAZ is down. Both UNG and GAZ should move together, but they don't. HZBBF, introduced in this blog 2 weeks ago now trades under another ticker symbol: HNUZF (special thanks to New York Investing member Joyce K. for first reporting the change). The new trading symbol can't be found on Big Charts yet. The symbol changed after a 5 to 1 reverse split. This split and the symbol change make no sense whatsoever. Both have made it much harder for the individual investor to trade natural gas. Perhaps that the idea.

NEXT: So Much for That Recovery

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.