Honest Money Gold and Silver Report: Market Wrap
Week Ending 7/11/08
Fannie Mae and Freddie Mac account for approximately 50% of the mortgage market. They either "own" or insure about $6 trillion of mortgages - nothing like putting all your eggs in one basket. The GDP of the U.S. is about $13 trillion - smart - real smart.
So, what will happen? They will either be bailed out or bought out or restructured or the wizard's of finance will invent something new. But you can be sure of one thing: you and I will pay for it - We The People always do, until we put our foot down and say: enough is enough. Throw the bums out of office and elect honest representatives who know what the hell they are doing: it's called: service to We The People. Think about it - and vote accordingly this fall.
I read one "expert" on Bloomberg saying that the government will not let them fail as the entire mortgage and real estate market will fall apart and everyone knows that's the largest and most important market there is. We can't have that come tumbling down now can we? That would be like Humpty Dumpty having a great fall and all of the King's men not heeding the call.
I've got news for Mr. Expert: the Forex Market is the single largest market in the world - that's the sum total of all currencies that are the basis of all asset classes. The real problem is the nature of paper fiat debt-money. Paper money is the root cause of the billions of dollars of risky bets known as derivatives that have gone bad. Such is the blow back from toxic risks that should never have been entered into to begin with - unrestrained greed run amuck and now on self-destruct. The clock is ticking - the time coming.
Other news came in that The U.S. Bureau of Economic Analysis and the U.S. Census Bureau reported that goods and services deficit decreased in May from $60.5 billion in April to $59.8 billion in May. Export increased more than imports.
As if that were not enough to ponder over the weekend there is another casualty in paper fiat land: IndyMac Bancorp was seized by Federal Regulators. This has the infamous distinction of being the second largest bank failure in U.S. history. Stay tuned - there will be more. Monday morning may prove interesting if nothing else. Question: what happens in the FDIC runs out of money to bail out failing banks? Answer: The Fed prints more. Question: Who pays for it? Answer: We do.
Moving on to more mundane affairs: The U.S. Dept. of Labor reported that the U.S. Import Price Index rose 2.6% in June following a 2.6% rise in May. Prices were led higher by oil.
Foreign direct investment in China was up 45.6% from a year earlier, which may cause inflation to rise. For now, the Bank of Japan is content to hold interest rates at the present level.
The Federal Reserve made several comments this past week that hint that all is not well in paper fiat land.
The Fed is considering extending the duration of our facilities for primary dealers beyond year-end
The Fed is working with the SEC to "increase the firms: capital and liquidity buffers."
A fairly accurate gauge of the level of financial stress in the markets is LIBOR, the London International Offered Rate. The difference between the what traders expect for the Fed's benchmark rate, and three-month interbank loans has moved up to 0.74 percentage points, from 0.64 percentage point a month ago.
The chart below compares many of the different commodity charts/indices since the beginning of the year. Note that except for energy, gold, and silver - all the other indices are down and down hard, some over 20 - 40%.
How any rational person can say we are in a new bull market is beyond human reason. There is much more to go to the downside, especially in real estate and related sectors, although short term the market is oversold and may bounce.
Any rally up is a counter trend rally in a bear market decline, and we will use it to lighten up on positions or to go short the overall market. We care not to be on the long side except for special situations and perhaps the Brazilian equity market.
The above does not paint a pretty picture except for oil, silver, and gold. As far as the rest go, it is better to be on the sidelines and in the safety of cash.
The Dow fell to new lows for the year. Volume increased on the decline, which is not a good sign. The market is oversold, however, and due for at least a short term bounce. The world is also waiting for the second coming.
Any rally up from here should be viewed as a counter trend rally in a bear market. Strength is to be sold into.
No matter what the spin doctors spew forth - that it is all it is: deceptions and illusions from self-serving entities with vested interests.
As mentioned in this report many times, I have stated that any surprise in bond yields (interest rates) would be to the upside. Yields are starting to rise. It remains to be seen whether a new trend is in the making or not.
Both charts that follow show 10 year yields rising and bond prices falling. If bond prices fall further, it could get serious - the mortgage market will not be happy.
This week was witness to the pathetic rally in the U.S. dollar coming to a screeching halt. As the dollar fell, gold and the euro rose. Much of the action in all three markets is taking its cue from interest rates - both in the US and abroad.
Perceptions are moving the market based on future expectations, which change with every nuance whispered by any central banker or like-minded authority.
Below are the charts of the U.S. dollar and the Euro, which along with the Yen are the most important currencies.
The yen will greatly affect the future action of the U.S. stock market. If the yen rises the stock market will falter. I believe this almost written into the script at this point.
First up is the daily chart of the dollar. It shows the dollar about to break down once again. If it does it will test the April lows. A further decline will put a wind to gold's back. If it does not decline any more - it will put a head wind to gold's rally.
The euro tends to move inversely (opposite) to the dollar, and in the same direction as gold. Presently, the euro is in a rising price channel, recently making a gap up. The blue horizontal trend line represents significant support, which if broken, will greatly affect gold's recent rally. If the euro continues to rally - so will gold.
Many of the markets are reacting to the perceived future direction of interest rates, not only here in the U.S. but overseas as well.
The market is concerned with the relative strength or weakness between the various currencies, based not only on their rate of interest, but on their rate of debasement or loss of purchasing power. This is commonly referred to as inflation, although such inflation is price inflation - not monetary inflation. Both are a pox of sorts - a visit from the unholy grail.
The first is the effect; the second is the cause thereof. Presently, the world's currencies are undergoing a bout of currency devaluation. It is not so much a question of which currency is the strongest, but which currency is the least weak.
Commodities have begun their correction, which so far has been nothing drastic. Some have already progressed significantly, while others such as oil are just beginning.
The daily chart below of the CCI Index shows that it is approximately 3% off its highs - nothing but a normal and healthy correction, at least so far.
The weekly gold chart looks good. It rose +2.89% on the week, closing at $960.60. The 65 week ema has acted as support all through the bull market and it sits at 824.01. The weekly chart below clearly shows support at the 65 ema.
The daily gold chart below shows gold well above its 50 dma, its upper trend line, and horizontal support. RSI has steadily been rising and is approaching oversold levels.
Volume increased on the rally, which is a good sign. Price generally follows volume. MACD is well into positive territory and has further room to go if it so wants to.
The only thing I don't like on the charts is the two most recent gaps up that may or may not need to be filled.
If and when the dollar rallies the euro will most likely falter short term, which if it does happen will put a short term head wind to gold's advance.
If such develops it will most likely provide the final bottom before the next intermediate term gold rally begins.
More backing and filling builds a larger and stronger base from which a more sustainable rally can launch itself from. Or, gold may just decide to keep on trucking.
And as proof that the bull market in gold is not just in U.S. dollars, below is a chart of gold priced in Euros. As can be seen - it is breaking out there as well.
It appears the gold bull is alive and well. One caveat: there still remains the possibility that an intermediate term low has not yet been completed. This does not mean a new low has to occur, although that is a possibility - it has more to do with time: the fact that more backing and filling is needed to build a stronger base.
As far as gold corrections go, this one has been short in the tooth, usually they take longer, but the time factor is not written in stone. The stronger and longer the base is in its formation - the larger and more sustainable is the next move up when it does occur.
Intermediate term bottoms are a function of months of price action not weeks. On occasion the months can morph into a year's time and sometimes more.
Lastly, to show all sides of the story we note the point & figure chart of gold. It has a bullish price projection of $970.00 with an ascending triple top breakout on July 11, 2008. Also, note: price presently sits at $960.60.
Silver's point & figure chart is positive, showing a bullish price objective of 220 with price closing the week out at 186.39. On Friday an ascending triple top breakout occurred, which is quite bullish, but needs follow through confirmation.
The GDX had a pretty good week gaining about +3.5% to the upside closing at 48.71. RSI has turned up nicely and MACD and the histograms are in positive territory. Overhead horizontal resistance is just above at the 50 level.
The dominating chart feature is the dead man's cross of the 50 ma crossing below the 200 ma back in early June. The 50 must reverse and cross up and over the 200 ma before any kind of sustainable intermediate term rally is possible.
It appears more time is needed with backing and filling to form a stronger base from which to launch the next big move. Late summer or early fall is the most likely time.
The chart below of the Hui/Gld Ratio goes back to the start of the bull market. It shows the intermediate term moves up that have been made thus far.
Notice that after each significant move up that the market then consolidated sideways for about a year.
The markets are very tough to trade right now. Volatility is brutal. One day the market is up 100 points and the next day it is down 200 points. One day gold is up $15 per ounce and the next day it is down $25 an ounce. The same holds true for oil and many other markets. Recent action is not for the faint of heart.
Sometimes to be in cash and on the sidelines watching is the best strategy. It appears that such may be a good idea at the present time. There are still some pockets of strength but they run thin and very selective. The return of your investment trumps the return on your investment at times such as this.
I will list two stocks that I have mentioned before and still like. Even last week I booked some profits in one and the week before in the other. I still hold positions in both so caveat emptor.
The first is CEF which hold physical silver and gold, as such it is not subject to the risk that gold and silver mining stocks are. The second is DBA which holds a basket of agriculture grains needed to make basic food stuffs.
The latest full-length version of this week's market wrap is available on our web site, including all positions bought or sold this week and my entire portfolio.
Stop by and check it out. Most major markets are included with the emphasis on the precious metals market.
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Good luck. Good trading. Good health, and that's a wrap.
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