Honest Money Gold and Silver Report: Market Wrap
Week Ending 2/15/08
Everyone knows that gold has been going up strongly and that stocks have been going down. Let's take a look at a comparison of the performance of gold to the Dow.
As is evident, gold has far out performed the Dow since 2001. The lower the number the stronger gold is versus the Dow Industrials. So far is has been no contest.
Next up is a chart of the Dow with the volume appended beneath it. It does not paint a pretty picture.
A comparison between price action and volume shows that as the Dow fell - volume increased. As the Dow rallied to lower highs - volume decreased.
Price generally follows volume, which does not allude to good things. It strongly suggests this is simply a bear market counter trend rally.
The above charts hints there is more downside action coming. Rallies are to be sold and corrections should not be bought, except by well seasoned traders for short term plays.
Most should lighten up and step aside. Let the rogue elephants run around until they run themselves out.
There are other markets that provide a better risk to reward ratio, and there are always special situations or stocks that buck the overall trend. Now is not the time for the "herd" mentality.
Next are a couple of charts compliments of the St. Louis Federal Reserve Bank's website. Alone they do not paint a pretty picture, together that almost rival the brothers Grimm.
The lower this number goes, it means depository institutions are borrowing funds either in the Fed Funds market and/or through the Fed discount window in order to meet their reserve requirements.
Based on the above chart one would expect a large increase in total borrowings, but look at the increase - it's off the chart. Money is tight.
The chart below shows that since mid-Dec. bonds have been the recipient of hot money moving out of stocks.
A higher number means bonds are out performing stocks. A lower number means stocks are stronger than bonds.
The yield curve is steepening, which means the distance between short term rates and long term rates is increasing. Short term rates have been coming down faster than long term rates.
The euro/dollar cross appears to be constructing a triple top from which it has declined. It touched its bottom support line and has rallied up to about the mid-point.
The bottom trend line needs to hold as support and the euro could take a pretty good hit, while the dollar rallies. It still could, however, go either way.
With the European Central Bank talking about lowering interest rates, and so many short the dollar - it would not be a surprise to see the dollar rally. Caveat Emptor.
Next up is a daily chart of the U.S. dollar. Signals are mixed. RSI has been declining, but will it decline further or turn up?
MACD has been falling from positive territory back towards zero. MACD presently has a positive cross over, but it looks like it's starting to roll over.
It is possible for a rally up into the 78-79 area if one starts and gains momentum. There are many shorts that would be forced to cover their positions - driving prices higher. It would still be a counter trend rally in an on-going bear market.
The weekly chart of the U.S. dollar below clearly shows the long term downtrend the dollar has been in since 2002. The chart keeps descending relentlessly, as if it's the stairway to hell.
Notice, however, there is room for the dollar to rally back up to its falling trend line, which would take it to near the 80 level, still leaving it well within the confines of its long term downtrend.
RSI is turning upwards. MACD has put in a positive cross over and the histograms have turned positive as well.
The more it can rise, the more momentum will build as shorts are forced to cover their positions. Stranger things have happened, and stranger things will happen.
Gold was down $16.20 for the week, closing at $906.10 for a loss of 1.76%. I get asked the question a lot: how low could gold fall?
I wish I knew. No one knows for sure. There are only probabilities, no guarantees.
Below are some probabilities, none of which preclude that gold is necessarily going immediately. When and if it does, it will be a buying opportunity.
The dominant chart feature on the daily is the negative MACD cross over. Until that is resolved to the upside - the upside is limited.
Notice the 50 RSI level has held in the past as support. It's coming up soon. The bottom Bollinger Band should also provide support ($880)
The weekly chart shows RSI in overbought territory, as well as MACD, and at the bottom of the chart is the commodity channel index, which is extended, but below its prior peak.
The middle Bollinger Band offers the first support level at $832, and the lower support level is formidable support at $722-$720.
Keep a close eye on the dollar. If it begins to rally - gold will be facing a stiff headwind.
Silver was up 0.01 cent for the week, closing at $17.12. Silver out performed gold again this week.
Below the Silver Trust weekly chart shows RSI bumping into overhead territory.
All of the indicators on the chart are well into positive territory, suggesting that price is a bit extended. However, in strong bull markets price can remain extended - as the Platinum chart clearly shows.
Platinum has been on a tear as of late, making new highs on a daily basis for days on end.
The reason is that demand is overwhelming supply due to the shut down of South Africa's platinum mining, which in turn is due to a lack of electric power available from Eskom - the major power supplier.
The chart is a perfect example of how in a bull market prices can remain extended for long periods of time - at unimaginable levels.
The Hui Index gained 0.79 to close the week out at 435.06. This week the pm stocks out performed physical gold, but it wasn't a week to write home about.
The daily chart has RSI flat at 47.51, showing an earlier positive divergence where it made a lower low and price did not.
The blue vertical lines indicate where RSI broke below 50 previously and by tracing them down the chart the ensuing price action is seen.
Price is testing its 50 day moving average and its bottom trend line. It is important for the support level to hold.
MACD is still under a negative cross over, but may be flattening out. It needs to turn up and make a positive cross. Histograms are receding back towards zero, and an earlier positive divergence remains.
GDX shows essentially the same as the Hui, however, GDX actually trades and volume has declined on the correction. That is positive.
Aside from RSI, most indicators are oversold, with two positive divergences present.
Below are the daily and weekly charts of the pm stocks vs. physical gold. A bottom appears to be forming and a rallying may be coming.
With reduced platinum supply out of South Africa platinum prices have soared.
Mines that produce platinum and our outside of SA have seen their stock prices rise. Below is the chart of Stillwater Mining. The huge move up is self-evident.
We sold our positions into the spike up on Friday. There is most likely more coming, but we are more than satisfied with the gain.
United Natural Gas
Jack Frost finally decided to pay the U.S. a visit over the past couple of weeks (as he always does). Temperatures plummeted in the colder regions of the country.
Lower temperatures means more heat was needed and natural gas responded in kind.
Also, there were a lot of players short and as the price moved higher they were forced to cover.
We sold our positions into the last spike up. Once again, there may be more upside acting coming, and that is fine with us.
Chesapeake Energy Corp.
Chesapeake Energy is in the gas business. With the rise in gas prices it has responded in kind.
We sold our positions into the move up as we had bought them significantly below.
The CCI index at the bottom of the chart shows an overbought reading, and volume started to decline on the move.
It was good enough of an excuse for us to take the money and run.
Coeur D'Alene is a major silver producer. It appears to be getting ready to make a move higher. Obviously, how silver itself does weighs heavily in the equation.
RSI is, however, flashing a positive divergence. It made a lower low, while price made a higher low. That is a positive sign. Now it needs to play out that way via positive price action.
Price is becoming more and more compressed as the triangle formation narrows. Price will break either strongly up or down. It should not be long either way.
It will be constructive if RSI can break and stay above the 50 level. MACD is still under a negative cross over and needs to turn up and make a positive cross. Histograms are receding back towards zero.
The p & f chart has a bullish price objective of 9.25 - it just doesn't say when. Oh, if it were that easy.
Disclosure: I own both CDE above, and HMY that follows.
Harmony Gold Mining
Harmony Gold Mining has been one of the leaders in the gold bull market, rising from 3.31 to a high of 18.84 in 2006. From there, however, it has been all down hill.
The big hit began in mid-2007 when HMY fell from 16 down to Friday's closing price of $10.11. The monthly chart depicts the wild ride up and down.
The P&F chart shows a bullish price project of $20.50 (double).
Last up is the daily chart of Harmony. RSI is turning up and approaching the 50 level.
The histograms are receding and look ready to cross into positive territory. MACD has flattened out and is starting to curl upwards; looking like it may be getting ready to make a positive cross over.
Volume has increased on the recent move up. That is constructive. Now it needs to follow through. The big test waits at the 50 dma, which is at $10.63.
If HMY can breach that, it may turn the corner - finally. It has some of the largest gold reserves in the world, and new management is making needed long overdue and needed changes.
However, there are power problems in SA, and HMY is still subject to overall sector risk. Caveat Emptor. I own a bunch of Harmony.
That's about it for this week. Next week we will look at some possible new plays - all of which are in the commodity markets in one form or another.
Do yourself and your kids and their kids a favor - vote for Congressman Ron Paul for President.
He is the only honest man running for office, who knows what he is talking about, and who has a clear vision of what would be the best course for our country to take.
You might ask: what is his platform? Take the US Constitution out and read it (click open the underline link in blue). That's his platform.
Read in article 1, which spells out in concise terms what our money is supposed to be: gold & silver coin AND no bills of credit (paper money). Ron Paul espouses the same.
We are so far off course, especially in following our own Constitution that we are essentially lost and in unchartered waters. We need to return to the path that leads to the proper way.
Good luck. Good trading. Good health, and that's a wrap.
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