Week Ending May 12, 2006
The stock market took a pretty good hit at the end of the week. We had mentioned that there was internal underlying deterioration and it came to the surface yesterday and today. The DOW was down 119.74 to 11,380.99.
The new highs vs. new lows ratio turned around 180 degrees with almost 200 new lows and only 35 new highs. This is a significant change. Decliners also led advancers by 4 to 1.
In addition, this occurred with rising volume, whereas the previous moves up were on lower volume. The NASDAQ was down 28 points on increasing volume of 2.28 billion shares.
If the overall market remains under selling pressure this will most likely spill over into the precious metal stocks as well, which is another potential risk to be aware of and to have a plan for - even if the plan is to just sit tight.
All things with the term commodity affixed to them have been on a tear of late putting in stellar bullish performances. Inevitably, there was a bit of a respite as most commodities closed down.
WTIC was down $1.40 at $73.28. On the daily chart, the histograms have turned negative. The weekly chart we show below still looks good, but the upper trend line appears to have turned the price action back - at least for now.
With the numerous volatile geo-political events unfolding, anything could happen. The price could soar, the price could collapse, or the price could just hang out. Welcome to the 21st Century New World Order.
As we have often repeated - watch the price direction of oil for a hint to the direction of gold and silver and other commodities as well. The weekly oil chart follows.
The price of oil is sitting on the balance point that can pivot either way - and it will. The direction of the next move may be quite significant. If we had to give a direction, we would say down - with the caveat that any escalation in the many geo-political events surrounding oil would obviously cause the price to rise significantly.
Just the possibility of such is placing a bid on the price of oil. Likewise, any reduction in tensions would take the support away and oil would fall.
The CRB as with most commodities was down at the end of the week; however, the weekly chart still looks good. We note that it recently approached its upper trend line and subsequently fell back.
Bond yields continue to rise, which is NOT what the Fed wants to see on the long end. The 10 - year note closed at 5.18% and the 30-year hit 5.29%. Rising interest rates puts pressure on the mortgage/real estate market.
The Fed is walking a thin line trying to caress the real estate market down ever so softly and gently. We wish them luck. It is not a job that I would want to have.
Note the second chart below of the long-term trend in yields. They are fast approaching critical levels - levels that go back 10 years. A break above the trend line does not bode well for the mortgage and real estate markets, and hence the economy.
TEN - YEAR TREASURY YIELDS
TEN -YEAR TREASURY YIELDS
If the above trend line gets broken through to the upside, then the outlook for interest rates is not good, as it will signal further increases ahead.
This is not what the Fed wants, neither is it what the real estate market wants, nor we presume is it what the average American wants. Nevertheless, we don't often get what we want. We remain fixated on this chart for further developments.
The U.S. Dollar
The dollar keeps doing what the dollar does best - deteriorate, debase, and lose value. This week was no different, as the dollar was down .24 to 83.83 and is getting very close to some serious support levels that best not be broken.
If they are breached there well may be a lot more other "things" that get broken besides, or perhaps they already are broken but such is not permitted to be said, however, we think the strain will be more than they can bare. They will be seen as they are: "broken".
Below is a chart comparing the performance of the US Dollar to Gold. Note they are almost mirror like images of one another in opposing directions. The resemblance is almost eerie. No, we stand corrected - it is eerie.
GOLD AND THE U.S. DOLLAR
Gold is steadily marching up the cliff the dollar has fallen off. There will be respites along the way, however, a change in the trend would take some doing and is far far away. We will not put up a longer-term chart of the dollar, as enough carnage has been shown.
It is not a pretty chart. Furthermore, to be the chart of our currency is a national disgrace, perpetrated by those in high places who know better yet remain unfazed. How we have come to this is more than unbelievable. "Those whom the gods wish to destroy, they first drive mad."
Gold was down $9.60 to $711.50, while silver was down 0.73 cents to $14.31. The precious metal stocks got whacked pretty good: the HUI was down 18.61 to 368.60 and the XAU was down 6.68 to 159.41.
GOLD CONTINUOUS WEEKLY
A more bullish chart would be hard to come by. The only caveats are the overbought readings of RSI approaching 90 and MACD well over 40. But that is what bull markets do best - they rise and stay at overbought levels. There is noticeable support at the 550-570 level.
The XAU closed at 159.41, which is 4 points above its February high. The gold stocks are still under performing the metal.
Since February, gold has gone from $575 to $715, which is a 24% increase. The XAU Index has hardly moved. The HUI has fared better - it is up approximately 9% since its February high.
There are those who now say that the relationship or ratio between the stocks and the physical is no longer valid. This may well be true. However, we would prefer not having to decide if the negative divergence is valid or not.
We would prefer that the stocks moved ahead with the metal. Nevertheless, the market is not here to accommodate us or what we want - which is exactly the reason we question the point and make the observation.
Lastly, we will point out that the ROC has turned downward and the histograms have just barely turned negative.
Silver has outperformed even gold since February and is up over 33%. Once again, however, many of the major silver stocks are flat and a few have even broken down (PAAS, CDE, SIL).
As with the gold stocks we would prefer to have the silver stocks at least rising with the price of silver - if not actually leading the pos. We note that ROC has turned down.
If nothing else, taken together, the under performance of both the gold and silver stocks may be hinting at the next major direction of the precious metals. Perhaps not.
Nevertheless, we prefer to be sitting with the metal as opposed to the stocks at this time. The stocks are also subject to overall market risk, which as seen at the beginning of the report is starting to become increasingly risky. Prudence dictates to be cautious and content with the profits that have been booked thus far.
SILVER CONTINUOUS DAILY
We have saved our favorite chart for last: the London PM Fix for gold going back to 1975. The chart is a snapshot view of what gold has done in the last three decades.
The 1980 all time high of $875 is evident. Gold shortly thereafter made a lower high just above $700 - the price level we are presently at today.
Since gold broke above the $400 level, there have been a couple of intermediate term corrections. The last one was in May of last year (2005). It is healthy for all bull markets to correct - the corrections provide longer-term sustainability.
GOLD - LONDON PM FIX 1975 - PRESENT
We have no idea from what price level gold is going to correct from - in regards to an intermediate term correction of any significance.
However, it is closer than further away in our opinion. We have sold almost all of our precious metal stocks into the February highs; we may sell the rest depending on how far the market runs from here.
We are not buyers of either precious metal stocks or the physical at these levels, and we prefer to be sitting in possession of the physical rather than the stocks.
Our physical holdings are not for sale. The reason we accumulate physical gold and silver is as a store of wealth - why would we want to exchange it for paper fiat debt-money that continually loses purchasing power and value.
Our game plan remains the same: buy the stocks on weakness during intermediate term corrections, and sell into strength during intermediate highs.
We then take the profits from the stocks and reinvestment them in the physical metal during the next intermediate term correction.
We are thus paying more and more for our physical position, however, it is more than offset by the increased profits in the stocks.
As Dennis Gartman's friend was fond of saying: "when they're yellin we're sellin, and when they're cryin we're buyin." Sounds good to us - and so it is.
We are very fond of the following words of wisdom - for several self-evident reasons:
"Gold would have value if for no other reason than that
it enables a citizen to fashion his financial escape from the state."
[William F. Rickenbacker]