Happy Weekend! After the last few weeks even someone like me who loves what they do is happy to see the weekend! I wanted to start off this week and talk about some of the recent headlines before moving onto our technical analysis on the markets. It's been an interesting couple of weeks. Let's start by discussing the many angles of this move to tap the Strategic Petroleum Reserve. This move has gotten a lot of flack from just about everybody, as well it should. A 30 million barrel release of a commodity we hold so dear to us, is stupid from an investment aspect, but it is also completely inefficient. According to the US energy information administration, the USA consumes about 20 million barrels of oil a day. So that means they have released enough oil to run this country for a whopping 36 hours. In comparison, 11 million barrels were released after hurricane Katrina, and 21 million were released after desert storm. If any of this makes sense to you please contact me and explain, because I'm either too stupid, or too logical to make sense of this on my own.
Whether this was a ploy to bring down gas prices as Obama sets his sights on reelection, as some have stated is beside the point. The only way I'm looking at this, is from the view point of the fed. If you've been around the gold game for more than 5 min, you know the dirty tricks that get pulled on us. You also know the massive moves gold is capable of making to the upside. That's because they are "allowing" us to run. The powers that be know better than to stand in front of the gold market when it's breaking out, so they don't. Instead, they take every opportunity when there is some weakness to slam things even more and make us bleed. Which of course, causes more weakness and fear in the market and it continues to feed upon itself. All they need to do is get some momentum rolling and sit back and watch the chain reaction take effect. This is what they are doing with oil now. Now that it has already dropped from 114 to 90, they are REALLY trying to put the screws to the market to make everyone think its going back to 75. It won't. This all kinda ties into the fed statement, in which in response to a possible QE3 the bernank said "The fed stands ready to act in the event we need to." Translation: If we get a deflation scare, which we are creating purposely by saying this in order to bring commodity prices down hard and fast, we will print money. Now, as consumers, you and I know that gas is about $3.75 a gallon now, down from $4 a few weeks ago. (I live in NJ so I'm quoting what its cost me recently.) This is up from much less only a year ago, so is there inflation? Of course, we know that based on our daily lives, but that is not how the fed knows that. They only know it from looking at CPI. Gas prices are still high, but if by saying there is not going to be a QE3 "At this time" and releasing 30 million barrels of oil we can violently bring down gas prices, guess what CPI is going to look like next month? Down sharply, and that's all they wanted. If you didn't watch the speech the bernank gave 2 weeks ago, do not fret, I can sum it up in a one sentence quote of his; "Interest rates are likely to quickly rise." He speaks in such a way to say 2 different things to 2 separate audiences while only having to say 1 sentence. By saying that, he has now scared the politicians enough so that when he DOES do QE3, they will not question his actions, while simultaneously saying to the markets, "Calm down, I will be there to support you." Rather brilliant, I must say. So long of course as your wearing you fed ear filters to translate the BS.
There are 4 main things that the fed pays attention to: GDP, unemployment, inflation and interest rates. GDP is going down, unemployment is going up, inflation is rising, but luckily interest rates are still low. So they are 1 for 4 now. The biggest tool the fed has is talk. They can't talk up GDP, nor can they talk down unemployment. They can have an effect on interest rates, and by denying another round of QE, they are in a sense talking down inflation by giving a deflation scare. I think it is important to remember where we sat when QE2 was announced. Oil was $85/barrel. Now, we sit at $90. Almost enough to feel comfortable pumping up the economy again. I have said before money is a drug far worse than crack or heroin and the market is feeling the withdrawal symptoms now. I liken it to a child in the supermarket screaming at 110 decibels "I WANT CANDY"! The question is, will the child's mother (Bernanke) give into the child (the markets) and give them the candy, or deal with the splitting migraine that ensues? There is not much time left till Christmas when you think about it. Do you think with all the sliding economic numbers recently that the fed will send the consumer out to carry the holiday season on their own? Further stimulus will be given before hand one way or another. They may not call it QE3, but a rose by any other name will still make our currency smell like shit. Here is a thought to ponder; The avg rate of the 2yr, 10yr and 30yr is 2.5%. The treasuries on the fed's balance sheet totals 2.6 trillion dollars. 2.5% of 2.6 trillion is a return of 62.5 billion dollars a year. (Hey maybe treasuries aren't the worst investment if you got 13 digits!) With some clever wording, they can easily implement the purchasing of additional treasuries based on the yield of the current ones (Dividend reinvest essentially). Which of course grows the balance sheet making next years yield even more etc, etc. There are ways they can do this beyond the obvious is all I am saying. And it will be done, sooner than later.
Now that I've written more than I intended to on those subjects, lets move on to the markets. The first chart is gold. (actually, it's the GLD which I am only using because stockcharts for some reason does not provide the option any more to switch to candlestick charts on the daily commodities. The chart is GLD but I will be quoting prices in terms of Gold.) The picture that is unfolding looks very similar to what we saw occurring 6 months ago at the low 1400 level. The first thing to notice, is that we consolidated unable to break above 1440 for 3 months. MACD in that time began trending lower as price consolidated until finally, we broke below the 50 day MA and fell $50 from that point. Today, we have spent a little more than 2 months consolidating above 1500 and have been unsuccessful in breaking above 1550 again. MACD is trending lower, and a buy signal we almost got from it, was quickly reversed. The clincher, was Friday's action where we broke below, and closed the day AND week below the 50 day MA. (Also, I want to point out that on the weekly chart MACD has turned below the MA and is heading lower too, so the daily looks like a sell, and the longer term chart confirms the same. I didn't want to have to post another chart just for that one footnote.) So it looks as if summertime blues for gold will be back this year. Now, if you have ever read anything I've written you know how much I harp on the fact that gold in the last 2 1/2 yrs has found a bottom on every major decline PRECISELY at the 30 week MA (or the 150 day MA) This, despite everyone's calls for a test of the 200 day. It hasn't done it in over 2 years. The trend is our friend, go with it. Consequently, the 30 week MA rests nicely at 1440, which we know from our major consolidation 6 months ago that the 1440 level will now act as major support, so this should be a level we buy strongly at when it occurs. Being that in fact, a broken clock IS right twice a day lets assume we finally get that test of the 200 everyone will be screaming for. The 200 day is sitting about a whopping $25 below the 30 week still in that major support area. I don't know about you, but If I buy strongly at a test of the 30 week, which I intend to, and gold slips another $25 lower to test the 200 before resuming its climb, I can assure you I won't lose any sleep over it. So to sum up the gold picture, look for an attempt to retake the 50 day sometime next week, which from where I sit, will most likely result in a failure. Expect gold to test the 30 week and bottom around 1440-1460 by mid-late July, and be a strong buyer at that time. Our customary fall rally will take place again, just as our summertime blues has. I am eyeing near 1750 by year end.
Now the next chart is weekly silver which I am only going to discuss briefly as their isn’t much going on here anyway. To go back to my point on gold testing and never breaking below the 30 week MA, we can see that it is at that EXACT level (as shown by the green line) where silver has found support after it’s decline. What does it mean? Will silver now begin a more modest climb as gold has had? Will it consolidate above this level until it has another parabolic explosion? I’m not sure but it is rather interesting. One thing I am sure of, is that at these levels the miners a stacking piles of cash. With the majority of the silver industry able to mine silver for about $8/oz, levels over $30 will result in earnings power that I do not believe the market is taking into consideration nearly enough. Earnings on some of these smaller growing miners could rocket so much so quickly, that the market finds them suddenly selling for 8x earnings. The larger miners, will see such increased cash flow, they will be able to do acquisitions, share buy backs (as we saw Silvercorp announce) and possibly most important, DIVIDENDS! So the thing that I see when looking at the Silver chart, is simply sustained levels at 100% higher than 1 year ago. That’s the point when I stop looking at the chart of the commodity, and start looking at the chart of the miners.
Well, while we're on the topic of miners, this brings us to our next two charts; the GDX and the GDXJ. To say the miners' performance has been disappointing is an understatement. If you own miners and your feeling some pain, your misery has plenty of company, believe me. Myself included on that. Frankly, the level some of these guys are trading at is inconceivably idiotic if you ask me. Some of their PEs have fallen to levels that just don't make sense to any rational human. The market has been down on them, and even the gold community has jumped ship recently. This is fine by me, as we all know from a contrarian aspect what happens, when everyone runs to one side of the boat all at once. The boat flips. That's the good news. Any shorts that haven't covered are just greedy and will ultimately be slaughtered like the pigs they are. We all know the fundamentals always win out when a market is acting irrational like this one currently is, so just hold on. In the fall of 2009, gold finally broke $1000 and its been racing higher ever since. In the fall of 2010, silver had it's break out and has performed unbelievably well, and still holds much higher than it was before the break out. I believe, that fall 2011 will be the miners time to shine and could make gains from that point on, that make the break outs of gold and silver look like minor "pops". The juniors will outperform, the majors will buy them, have increasing reserves and cash flow that will ultimately result in higher dividends. As we look at the charts for the GDX and the GDXJ, I want you to keep one thing in mind; I expect the two to one day trade at par somewhere near the $75 level. This very well could be accomplished by years end.
This final poor excuse for a chart, is of the S&P 500. The action has been rather telling and what it does say, it's saying quite loudly. Since breaking below 1300, rallies have not been able to get back above that key level even briefly. So far the 200 day MA has held, but I fear after one more attempt to climb over 1300 and/or retake the 50 day MA, failing to do so will probably result in a failure at the 200 day MA as well. I believe we can easily see a repeat of what we saw the summer of last year and the S&P could consolidate in that "W" formation. If it were to not hold here, the next area of support is the top range of last years consolidation in the 1220-1200 region. This is what I anticipate to occur. Look as we go into next week for an attempt for 1300 and/or the 50 day. If we were to break under the 200 day, we could have a long and fast decline before we find any buying support.
Well, I think that will do it for today. In closing I want to say remember the fundamentals behind what you're doing and why they are right. Charts are a great tool but don't get too hung up on them. In the mean time, as we go into what looks to be a rocky summer for all markets, keep your leverage low and your patience high. It will pay off. If you want to trade, build a nice cash position and develop a wish list of things you want to buy going into the fall. Christmas will come early for gold investors.
-JM
