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December 21, 2008

Honest Money Gold and Silver Report: Market Wrap
by Douglas V. Gnazzo

Market Wrap

Week Ending 12/19/08

The Economy

The U.S. current-account deficit decreased to $174.1 billion in the third quarter of 2008. It was $180.9 billion in the second quarter. As a share of U.S. GDP, the deficit decreased to 4.8% from 5.1%.

Net acquisitions by foreign residents of assets in the United States less net acquisitions by U.S. residents of assets abroad were $135.2 billion in the third quarter, up from $122.9 billion in the second.

U.S.-owned assets abroad decreased $9.5 billion in the third quarter after decreasing $102.7 billion in the second.

Foreign-owned assets in the United States increased $125.7 billion in the third quarter after they had increased $22.7 billion in the second. This contributes to the presently existing negative U.S. international investment position, which means a greater percentage of our country's assets are owned by foreign entities: not a good trend. Refer to last week's report for a chart of the negative investment position.

The Federal Reserve lowered the fed funds target on Dec. 16 to a range of zero to 0.25 percent, the lowest among all major world economies. The Fed also stated that it plans to purchase agency debt and mortgage-backed securities and said it is considering buying longer-term U.S. government debt. Below is the press release from the Fed after its decisions to lower rates:

Release Date: December 16, 2008

For immediate release

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

It is obvious from the language employed that the Fed is willing to use any and all means at its disposal to provide funds to the financial system. They are even trying to come up with new ways to support the markets. This means that excess credit creation will continue for the forseeable future. Gold has picked up the scent.

The Bank of Japan cut its key interest rate to 0.1% and said it would buy corporate debt. A worsening recession has reduced financing for business loans. This is an on-going problem all the central banks are facing: although they have injected huge sums of liquidity into the system, most of it is not being put to work (loaned out). It is piling up and sitting as reserves on deposit.

Since Sept. overnight deposits at the ECB have surged. Deposits are up to 200.4 billion Euros as of Dec. 17, almost four times the daily average of 534 million Euros. The ECB has cut the interest rate it pays banks to deposit money with it overnight and lifted the rate it charges for emergency loans in an attempt to get banks to loan the money out instead of hoarding it.

The Conference Board's Index of Leading Indicators for November fell 0.4% to the lowest level in four years. Although the Fed has increased the money supply it has not been enough to overcome the weakness in building permits, housing prices, stock prices, and jobless claims. The Conference Board directly addressed this issue by stating:

"Without the very large increases in inflation-adjusted money supply since September, the leading index would have been significantly weaker."

This is the difficult task the Fed faces: it must overcome the deflationary pockets of weakness without creating inflation. I wish them luck - they will need it; and this is accepting that such monetary policy is desirable and valid to start with; which I do not believe is true.

Later in its report, the Conference Board provided further proof that the economic problems run deep:

"All in all, the continued widespread deterioration in the composite indexes suggests that the recession that began in December 2007 will continue into the New Year and the contraction in economic activity could deepen further in the near term."

Gold

Gold was up 16.90 closing at 837.40 for a weekly gain of 2%. Earlier in the week gold closed over the 850 price level, which marks the intermediate term trend.

A weekly close above this level would re-establish the trend as bullish. The weekly chart below shows gold bumping up against its 50 day moving average and both horizontal resistance at 850 and its declining upper trend line just above.

If gold can close above these three levels on a weekly basis, it will signal a new move up is beginning.

MACD has made a positive crossover and the histograms have turned up into positive territory as well.

Silver

Silver was up +0.62 cents, closing the week out at 10.67 for a gain of 6%. Gold was up 2% for the week, so silver outperformed gold by 3 to 1: a very good showing. I like the way silver has been acting the past few weeks.

Gold Stocks

The GDX Index closed up 6.66% this week at 30.58. This was three times gold's rise, and was positive confirmation of the overall strength of the gold sector.

A long term cup & handle formation was broken below in mid-2008, which turned long term support into resistance.

Now, the horizontal trend line has been regained and becomes support. This has very positive long term implications.

The latest full-length version of this week's market wrap is available at the Honest Money Gold & Silver Report website. Stop by and check out the popular stock watch list that contains individual stock picks that have gained up to 35% in the last few weeks.

Just made available on the site is an audio version of the book Honest Money. A free copy is included with new subscriptions along with a free special report: Investment Vehicles for Bull & Bear Markets. A list of over 50 ETF's and other investment vehicles offering profit potential on both the long and short side of the market: stocks, bonds, currencies, gold, oil, water and more. Take a look at this week's report with twenty-seven easy to read charts and graphs.

Good luck. Good trading. Good health, and that's a wrap.

Come visit our website: Honest Money Gold & Silver Report
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Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

Douglas V. Gnazzo © 2005-2009
All Rights Reserved Without Prejudice

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