Friday, January 23, 2009

Gold update - significant development

It's time for a little self promotion here. At the end of 2008 we told readers to wait for a pullback in Gold before entering - Link . In the post "Gold, here" just a few days ago this blog then alerted our readers to a favorable entry in Gold when it was then trading at $807. Gold has since moved up to over $880, a nice gain in a commodity market. By doing so an old trend is threatening to end and a new one emerging. This is significant folks.

TRADE UPDATE 2/17: Gold break out above $950 - bullish sign
TRADE UPDATE 2/3: Gold needs a rest. Look for a retracement to $860
TRADE UPDATE 1/30: $925 reached overnight, avoiding new buys. Chart



For those not familiar, deflation is the contraction of both money supply and credit. I invite you to view the video: Fractional Reserve Lending - The mother of all Ponzi schemes to better understand how money supply and credit are linked. Popular media refers to our financial crisis as a "credit crunch" as if it were a mere inconvenience. This "credit crunch" is actually an outright destruction of money supply caused primarily by credit defaults, deleveraging and a refusal to lend and due to rapid asset depreciation. The purchasing power of remaining money becomes more valuable. Witness the sharp rise in the US Dollar since July 2008. If the US Dollar has more purchasing power, then by definition the assets it can buy become cheaper. Witness the plunge in all commodity classes in the past 6 months.

Deflation caused the Great Depression. Governments fear deflation and are doing all they can to prevent it. They are buying bad assets, providing stimulus and reducing interest rates - all in a vain attempt to prevent the awesome power of deflation. They will ultimately win this battle. Fiat money can (and is) be created out of thin air. Right now that money is staying within banks who are merely trying to stay afloat. The Trillions (yes Trillions) of Dollars being extended to banks in various forms now are being used to preserve their leveraged balance sheets. Here's the catch....it's still not working. So how can governments, and particularly the US Federal Reserve ultimately win the battle against Deflation? If all else fails they can use the "nuclear option".

In 2002 speech Ben Bernanke outlined clearly the options the Federal Reserve has at its disposal to fight deflation. The speech highlighted the challenges faced by the US in the 1930's as well as Japan in the 1990's. Ironically 6 years later Mr. Bernanke is having to implement almost all those deflation fighting measures. Just as he stated in 2002, the Fed is buying bad assets, buying Treasuries, reducing interest rates to zero. So what else can be done when these measures are not winning? Two excepts provide an answer:

"But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."
"Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation." - Ben Bernanke, 2002 Deflation: Making Sure "It" Doesn't Happen Here
"intervening to affect the exchange value" means purposeful devaluation of the currency in order to keep prices and wages from falling. If lowering interest rates, the overnight rate and buying Treasuries fail, a remaining option is to devalue the Dollar either through massive printing, a one time devaluation or a combination of these. In 1934 FDR devalued the Dollar against Gold by 41%. Notice how highly Bernanke speaks of this remedy.

The bottom line is Gold has been acting as a commodity. Gold retreated from it's $1000 high and succumbed (albeit mildly) to deleveraging and deflation along with the rest of commodities. However, now Gold is beginning to act like money. Financial Sense has also picked up on a recent divergence in Gold's behavior - Link. As currencies like the Icelandic Krone, the Russion Ruble, the British Pound and others fall under the force of deflation and deleveraging investors seek somewhere safe to put their money. So far that has been the worlds reserve currency - US Dollar. However, as the future of the Dollar and the fiat money system becomes questionable, more people are again looking to civilizations oldest and most reliable store of value - Gold. Savers in Iceland, Russia, Eastern Europe and now Great Britain who held their savings in Gold instead of the Krone's, Ruble's, or Pounds were/are unaffected by their currency plunge.

Is the Dollar the next shoe to drop? That is the question the world's wealthy are now asking, and you should too. For many it's not a question of if, but when. Thus the interest in Gold.

Saturday, January 17, 2009

Weekend Update

There are indications that the market is prepared to rally once again. We had yet another bounce off support in the DOW 8000 range along with two consecutive "positive reversals" last week. To help understand which stocks are likely to benefit the most from a rally it is helpful to see what is happening with the dollar. The dollar has been trading inversely with equities, particularly commodity related stocks. A weakening dollar will almost certainly benefit commodities. With that in mind I give you the dollar chart:

US Dollar



As you can see it's recent rally appears to be waning. Many important indicators point to a near term Dollar weakening. This of course makes perfect sense if the market is threatening a rally. So how should you take advantage of this? Ideally you want to identify stocks that are 1) not inflated, 2) near support, and 3) poised to make 100-200% gains in a weak dollar/strong market environment.


UPDATE 1/20: No love from the Dollar today, The Dollar index opened this morning at 85.5 which is a push above it's recent 85.3 high, thereby negating any entry attempts into commodity stocks.

Friday, January 16, 2009

Gold, here

GOLD:


Readers recall we resisted buying Gold, predicting a retracement from the $890 high of a few weeks ago. Since then Gold has behaved exactly as expected and we have seen our retracement. It's a busy chart, but there are 4 key elements which make a Gold position favorable here. Gold now presents a favorable entry point for the patient trader.

The convergance of primary indicators in order of importance are:

#1 A bounce off the upward trending 50 DMA
#2 Trendline support
#3 Multiple Fibonacci support

Secondary indicators (#4) also point to a favorable risk entry.

GG



Following on the Gold theme, non commodity traders will appreciate the Goldcorp chart. Like the Gold chart above, it too is displaying multiple indications. A convergence of a trend line and Moving average privide primary clues with oscillators showing stong agreement. From these we can derive 2 targets and one stop.
TRADE UPDATE 1/24: GG trade up 18% with more room to grow.

Saturday, January 10, 2009

Trade Notes 1/10/09

Crude Oil - Watch for inverted H&S formation Chart
TRADE UPDATE: Inverted H&S negated, still no opportunity at present.

Platinum - Due to retrace Chart
TRADE UPDATE 1/17: The chart is still indecisive - avoid.

DECK - Short, a break of the 50 DMA (now at $70) should take it down to $60. Chart
TRADE UPDATE 1/15: Target met, position closed. 18% gain New Chart

AZO - Now at $133, short to $120 looks reasonable. Chart

COH - Breakdown to $16 likely - Chart
TRADE UPDATE: $16 Target met, 15% gain.

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