Honest Money Gold and Silver Report: Market Wrap
Week Ending 5/02/07
The Bureau of Economic Analysis reported that real gross domestic product (GDP) increased 0.6 percent in the first quarter of 2008.
Consumer spending continued to be weaker, as was construction spending. They were said to be offset by a rise in inventory investment. When an increase in goods on the shelf not sold is regarded as a sign of strength that can offset the fact that the consumer isn't buying the stuff - well I'll leave it to the reader to decide just what that means.
Food and energy prices continued to rise, putting upward pressure on inflation. Prices of goods and services purchased by U.S. residents increased 3.5 percent, following a 3.7 percent increase in the fourth quarter.
Personal income was up 0.3 percent in March, after increasing 0.5 percent in February. Wages and salaries increased 0.5 percent, after increasing 0.3 in February.
Real disposable personal income
(DPI), income adjusted for inflation and taxes, was unchanged in March, after increasing 0.3 percent in February.
Real consumer spending
Personal consumption expenditures increased 0.1 percent in March, after remaining unchanged in February.
Personal consumption expenditures (PCE) increased 0.3 percent in March, compared with a 0.1 percent increase in February. Now, note the next statistic, as the only way that wealth is accumulated is by savings, which means that consumption has to be bypassed in order to save; or better still that there is so much production beyond consumption that the excess is saved instead of being consumed; or sold for profit that is saved, etc.
Savings as a percent of disposable personal income was up 0.2 percent in March. Remember, this is according to their statistics, which means it is as high as they feel comfortable reporting.
Can our standard of living be increasing or decreasing with an almost non-existent savings rate? Our bottom line (wealth) is measured by how much we truly "own" minus how much we owe (debt).
If we owe more than we own - we have a negative net worth, which is something worth thinking about, especially before voting. Listen to Congressman Ron Paul and see if what he says doesn't make sense accordingly. A ticket with Ron Paul and David Walker would be refreshing.
We are still in a bear market rally until higher levels are broken above. The charts show those levels.
The rally has gone from a short term move to an intermediate term rally, which is fast approaching overhead resistance.
It is a hard call to say a new bull market has started when the financial sector, the banking sector, the housing sector, and the broker/dealers are all falling off a cliff.
The main currencies to watch are the euro, the U.S. dollar, and the Japanese Yen. When the euro is rising the dollar is falling and gold and other commodities tend to trend in the same direction as the euro.
When the yen is down the carry trade is on and stock markets and most markets move up. When the yen is up, stock markets and many other assets head down as the yen carry trades unwind.
I'm looking for the next move up in the yen, which will not be until after this counter-trend correction in the euro and the dollar is finished. But it will happen, and when it does the stock markets will resume their trend down.
When the euro rallies against the dollar, gold and the other commodities will rally as well. This may be about to happen over the short term, but the intermediate term trend may take a while longer to reassert itself. All things will come in their proper time and in due course. Patience will be rewarded.
Interest rates were lowered by the Fed this past week. Here is their post meeting communiqué - the central issues have been highlighted.
Release Date: April 30, 2008
"The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.
Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco."
So, the Fed did its thing and lowered rates. The market has been following along or vice versa, at least on the short end of the yield curve specifically.
The long end of the curve has been slow to react accordingly. Thus the yield curve has been steepening.
What might the long end sense is coming or is here? Could it be inflation? Is the economy experiencing stagflation?
I have said for months now, and my timing has been off, that any surprises in interest rates will be to the upside.
I still believe that, particularly on the long end of the curve, and I am looking to short the long end of the bond market. The chart below hints why.
Bonds move the opposite direction of interest rates. When rates are up - bond prices go down. When rates go down - bond prices head up. Just ask China and Japan, they know how it works.
The 20 year bond fund in the chart below was down on the week (20 year bond prices were down). The horizontal lines show support that if broken will become resistance.
It will be most difficult for the Fed to defend bonds and the dollar. Bonds like falling rates - the dollar likes rising rates. Can't have it both ways - one or the other will have to give; it's even possible that both give.
Commodities are undergoing a counter-trend correction. They are in a powerful bull market that needs to correct and consolidate its recent gains in order to be healthy and sustainable.
The chart below shows various horizontal support lines. The 400 day moving average is a long term average that is only broken above or below at turning points in the long term trend.
Until lower lows are made along with lower highs, the long term trend is up until proven otherwise. A bull market consists of higher lows and higher highs. A bear market is made of lower lows and lower highs.
To call a bear market after it has just made new all-time highs seems a bit extreme. One cannot predict the future; if they did they would have no need of the markets. The fundamentals of monetary debasement are gold and commodity friendly. I wish it was not so, but it is.
It is true, however, that markets look most bullish just before they turn bearish, and they look most bearish just before they turn bullish. So, one must always be on guard of such changes.
However, whether the price action is of a short or medium or long term duration is the key. As of now the long term trend is up, and a short to intermediate term correction is occurring; and adjustments should be made accordingly.
Gold was down almost 3.56% for the week, closing at $858.00 down 31.70.
Horizontal support from last November is being tested, as marked by the black horizontal line on the chart below. Notice the 200 ma and the horizontal support line are converging.
MACD needs to start curling up to be in a position to make a positive cross over before any sustainable rally can begin. The histograms also need to begin receding back towards zero.
RSI has taken a slight turn up and may be telling of things to come. A lot of technical damage has been done on the charts by the recent correction and it will take some time and more backing and filling before a low is in place from which the next phase up can begin. Between 850-800 represents a range of prices for slowly scaling in, and will most likely be the last time below a thousand for years to come.
Next up is the weekly chart, which shows readings in some of the indicators that are approaching levels that in the past have coincided with bottoming action and subsequent rallies.
This doesn't mean that history will or must repeat; simply that it does rhyme from time to time; and that is good enough.
Silver was down just under 3% for the week, closing at 16.47 (-0.49). The weekly chart below shows strong support as marked by the black horizontal line at $15.00.
Note that the 50 ma is at the same price level. The vertical lines connect several indicators that have in the past marked intermediate term bottoms.
Silver at $15 will be hard to beat within the next couple of years.
The Hui index was down -2.75% for the week, closing at 399.54.
The Hui Index is starting to show some positive divergences as marked on the chart above. All of the indicators have made lower lows while price has not, as of yet made a lower low - thus the positive divergence, at least for the time being.
The black vertical lines connect several of the indicators together at readings that have in the past indicated intermediate term market bottoms.
Next up is a weekly chart of the GDX. It closed the week below its 50 ma (44.88).
Intra-week it tested the black horizontal support line, which has the 100 dma just below it.
A Study of P&F Charts
The following is a comparison of a number of point and figure charts for the same index or asset or stock over a few different time periods.
Some maintain that point and figure charts take all the random "noise" out of the chart and focus just on the important aspect - price. Perhaps this is true; however, the following comparisons do show that as with all things - point and figure charts do not always get it right, especially beforehand.
As you will note, many of the price projections never came close, and in fact some reversed a few different times within months. I found the information fascinating, but I'm easily entertained.
There were several new additions made to the stock portfolio this week.
They can be found under the stock portfolio listing at the bottom of the bulletin board under my writings.
Good luck, good trading, good health and that's a wrap.
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