Saturday, April 23, 2011

Gold, What to Watch out for in Early May

We have written before that institutional investors are going to wake up one day and realize that they need to buy gold for their portfolios. Well, that's beginning to happen. 

This week the Texas teachers’ pension fund, one of the largest college endowments, announced that it has placed 5% of its assets in gold bullion, nearly $1 billion's worth, in excess of 650,000 ounces at today’s prices. It is interesting to note that the fund chose to take physical possession of the bullion rather than buy it through a gold ETF. 

There they sit, all 6,643 gold bars, in an undisclosed location underground in New York City. The chief investment officer for the fund told CNBC that they began acquiring gold in September of '09 at about $950 dollars an ounce and that their average price is about $1,150. He said that rather than continuously rolling futures contracts, it became easier and more economical to take possession of the bullion.

The standard asset allocation recommendations routinely call for a 5-10% allocation to gold (which we find too low). Yet, despite gold’s rise it still represents less than 1% of the global market cap of all assets. Without a doubt, investors will be watching closely to see if this move triggers similar reallocations among other large pension funds. Some big time heavyweight investors are already deep into gold territory, as we have reported before. 

Some of the big-name investors who were smart enough to profit by betting against mortgage-backed securities have invested their profits in gold. In the fourth-quarter of 2010, legendary investor George Soros added 24,800 shares of the GLD making him the seventh largest holder behind John Paulson who owns 31.5 million shares. Large investment banks are also loading up on gold.

Gold and especially silver certainly shone this week – the latter even moved relative close to its 1980 high! Consequently, it will be particularly interesting to see what they do next. Since we live in a globalized world, it is often the case that markets influence each other. In this essay we’re going to focus on currencies and how two of them can affect the precious metals market. We will start with the long-term chart (charts courtesy by

In the long-term USD Index chart this week, we see a continuation of the decline which began in early January. Index levels are now close to the level of the 2009 lows, and this support line is currently being tested.

A slight move below the support line has been seen, but the breakdown is not yet in. RSI levels are currently close to 30 and indicate that perhaps the local bottom will be seen very soon. This has been the case many times in the past when RSI levels were so low.

Looking at the short-term USD Index chart, we see that index levels are still within the declining trend channel. The lower border was recently touched and the index moved back up slightly. It does not appear that a rally is imminent as the next cyclical turning point appears to be likely in early May. Until that time, more weakness or sideways movement is more probable as opposed to seeing any serious rally begin right away.

At this time, it’s too early to comment on the likely strength of the next rally in the USD Index. However, given the decline which has been in place since January with no significant contra-trend moves, it is possible that the rally could be significant. This of course, would be quite negative for the precious metals sector in general.

In the very long-term Euro Index chart this week, we can see that index levels have broken through the declining, long-term resistance line. This is a very positive factor and, taking this chart alone, we would expect the rally to continue.

Of course, the situation for the dollar will likely impact what happens with the euro to a great extent. A turnaround is expected in the USD Index but is not likely to be seen immediately. So the rally here in the Euro Index could continue and possibly turnaround in a few days or even a week from now. Of course, this is somewhat a speculation on our part but the charts are suggesting this possibility. In addition, RSI levels are about to flash an overbought signal as they are very close to the 70-level.

What does all of this have to do with gold? Quite a lot, as gold has been recently moving in tune with euro. Please take a look below for details.

In the short-term Euro Index chart, we see that the breakout has been verified and index levels have moved above the level of the November 2010 high. Since mid-February, tops in the Euro Index have corresponded to local tops for gold.

An early May turnaround could be seen here as well, as the cyclical turning points mentioned when analyzing the USD Index, are present also here. It seems that the next turnaround (likely a top) will be seen at the beginning of May. Such a development could have an important impact on the precious metals sector. As far as price targets are concerned, we will leave details to our Subscribers – in short, it might be a good idea to closely monitor the situation on the silver market.

Summing up, the decline in the dollar has continued but is likely to turn around within the next week or two. The rising Euro Index is also likely to see a downturn at that time. Taken together, these currency market events will probably have a negative impact on gold, silver and gold and silver mining stocks, but not necessarily right away.

Silver Crash 2006 vs Silver Today, Does it look Familiar?

By: Submissions

Willem Weytjens writes: First of all, here is an update of a chart I posted 3 weeks ago…

Chart created with Prorealtime

Second of all, here is a chart of the gold-to-silver ratio:

Chart courtesy 

Now let’s have a look at Silver in 2006, when it also made a parabolic move:

Chart courtesy

Here is the current situation:

Chart courtesy

Although silver is not as stretched above its 50 days Moving Average as in 2006, it is as stretched above its 200 DMA as in 2006.

Also, the RSI is very high, but not as high as in 2006, so we MIGHT see 1 or 2 more days to the upside, but then we might get a Deja Vu of 2006.

For those of you who want to know what happened on April 20th 2006, here is a chart:

Chart courtesy

Beyond The Stock Market VIX Volatility Index

I have traded options for a number of years and fully understand the "greeks" as should any active options trader. When you understand options you realize how valuable of a tool they are for investing, managing risk and understanding market sentiment. They are not as risky as many think. Before I share a rather important chart, I think it is important to go over a few option basics to fully appreciate what the data is telling you. 

Implied volatility (IV) is one of the most important elements of how an option is priced. The simplest analogy is that of supply and demand. When traders are buying a specific option they drive the IV higher. When they are selling they drive it lower. The technical answer is based on a theoretical pricing model like black scholes, IV is the value needed to equate to a given price.

Ahead of company earnings for example, investors buy puts or calls causing the IV to rise. Once earnings are over, IV falls and so does the price of the options. Stay with me here and I promise to keep it as simple as possible. IV varies across time and strike price and is not linear, in fact if you graphed the IV for various strike prices you would see a "smile." This smile though is not uniform and in fact shifted more towards puts and less towards calls.

The chart below shows such an "IV smile" both pre 87 crash and post. Notice how volatility is higher for puts (left side of the curve) and lower for calls (right side). The more fearful investors are the more they buy puts and less they buy calls. The result puts generally have a higher IV than calls. 

The VIX is the widely used measure of fear in the market as it measures implied volatility on the S&P 500. The lower the number the less fear, the higher the more fear. The CBOE though realized that the VIX does not capture the true picture of fear and or complacency in the market. Since the 1987 crash, investors have realized there is a risk of another crash and buy further out of the money options. In 1990 the CBOE created the CBOE Skew index which specifically measures these tail risks and how investors are pricing them in.

That's the class, now the chart. Below is a chart of the Skew Index VS the VIX from January 2008 to present.

Notice how since the March 2009, the Skew Index has actually risen while the VIX has fallen. The VIX has really given a false sense of security.

More importantly notice the two green boxes. The first is the flash crash of 2010. Notice how the VIX makes new lows while the Skew index makes new highs. Then once the market place reacts to falling asset prices, the VIX rises while the Skew Index falls. Now look at the next green box. The same exact divergence is occurring. Last month's selloff is even reflected.

The VIX is flashing a bullish divergence right now with the daily MACD which combined with the above chart should send chills down anyone who is overly leveraged and long this market right now.

If all was well, why would professional traders be speculating in out of the money options versus retail traders who based on the current VIX level are very complacent and have little to no insurance on their longs.

See the original article >>

Gold Tops $1,500 in Flight to Quality

The list of factors that have supported the price of precious metals in recent weeks is long. It includes worries about the sustainability of European debt levels — and whether countries like Greece will soon default; the threat of a possible downgrade of U.S. credit ratings amid an impasse over raising the debt limit and dealing with the budget deficit; the weaker dollar; rising inflation in many parts of the world and continued unrest in North Africa and the Middle East, which has pushed up oil prices.
 “We’re seeing a perfect storm for gold and silver prices,” said Robin Bhar, a senior metals analyst in London for the French bank Crédit Agricole.

“Gold is sometimes a currency, sometimes a commodity and sometimes a store of value,” analysts at Merrill Lynch wrote recently. “As purchasing power of workers in emerging markets increases, we see demand for gold as a commodity increasing over the next few years,” the Merrill Lynch report said. Orderly Move Higher

Unlike other commodities that have skyrocketed and crashed, the climb in gold has been very orderly. It is the only commodity whose long-term trendline is long and unbroken.

Gold could take a substantial hit, just as it did in 2008 and still keep its long-term trendline intact. Why is that?

The answer is currency debasement. A few charts from Interactive Map: Paul Ryan vs. Obama Budget Details; Path of Destruction will show what I mean.

Deficit: Obama vs. Paul Ryan

Interest on the National Debt: Obama vs. Paul Ryan

National Debt: Obama vs. Paul Ryan

National Debt is going to soar in 10 years from $15 trillion to $23-26 trillion if either Obama's or Ryan's plan is enacted.

That is currency debasement on a scale never seen before in the US. However, it is not just the US. The UK is a financial basket case and in Europe there is a sovereign debt crisis.

In China, credit is expanding at 20-30% a year. Indeed, China is printing money faster than the US. Thus, the idea the Yuan is undervalued is questionable to say the least.

For further discussion regarding China and the Yuan, please see Is the Yuan Undervalued?

So, why shouldn't gold be rising? If anything, the surprise should be how orderly the rise has been given massive currency debasement everywhere you look.

Gold is Money

Merrill Lynch analysts wrote “Gold is sometimes a currency, sometimes a commodity and sometimes a store of value.

Those Merrill Lynch analysts make a number of mistakes.

The fact of the matter is gold is always a currency and always a commodity. I make the case "Gold is Money" in two posts.

Money is Always a Commodity

Please consider a few re-ordered sentences from Murray Rothbard's classic text What Has Government Done to Our Money?
Money is a commodity used as a medium of exchange.

Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its “price” in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.

Money is not an abstract unit of account. It is not a useless token only good for exchanging. It is not a “claim on society”. It is not a guarantee of a fixed price level. It is simply a commodity.
What Is The Proper Supply Of Money?

Continuing from the book ...
Now we may ask: what is the supply of money in society and how is that supply used? In particular, we may raise the perennial question, how much money “do we need”?

Must the money supply be regulated by some sort of “criterion,” or can it be left alone to the free market?

All sorts of criteria have been put forward: that money should move in accordance with population, with the “volume of trade,” with the “amounts of goods produced,” so as to keep the “price level” constant, etc.

But money differs from other commodities in one essential fact. And grasping this difference furnishes a key to understanding monetary matters.

When the supply of any other good increases, this increase confers a social benefit; it is a matter for general rejoicing. More consumer goods mean a higher standard of living for the public; more capital goods mean sustained and increased living standards in the future.

[Yet] an increase in money supply, unlike other goods, [does not] confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices—i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value.

[Thus] we come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the gold-unit [monetary-unit].
The above online book found on is a great read. It is also free. It should be required reading for all members of Congress. Please meet with your legislative representative and get them to read the book.

The key point above is that money is a commodity. Yet unlike other commodities, an increase in money supply confers no overall economic benefit. Over time, money simply buys less and less.

Those three sentences and one look at the budget charts above nicely explain the rise in gold.

See the original article >>

How to Dodge the Coming U.S. Treasury Bond Market Crash

Martin Hutchinson writes: We're on a collision course with the worst bond market collapse in decades.

The warning signs are as clear as day.

There's still time to dodge the damage - and even to profit - if you know what to look for.

But the time to make your move is now...

Three Catalysts for a "Total Bond Market Collapse"
U.S. Treasury bond yields have been only moderately strong since December, with the 10-year Treasury yield rising from 3.31% to 3.40%. As a result, bonds have been a pretty unprofitable play for investors: In fact, a 10-year Treasury purchased Jan. 1 has lost 0.76% of its principal, which almost wipes out theroughly 1% in interest the bond has yielded during that same 3½ month stretch.

While that only represents a moderate decline in bond prices, take heed: That gentle slope leads directly to the precipice of a bottomless pit - a total bond market collapse.

There are three key factors that will cause - and even hasten - the coming bond market collapse. These catalysts are easy to spot - indeed, they're in the headlines virtually every day. 

I'm talking, of course, about monetary policy, inflation and the federal deficit. Let's take a detailed look at each of these potential bond-market-collapse catalysts:

•The Monetary Policy Blues: U.S. Federal Reserve Chairman Ben S. Bernanke has kept interest rates virtually at zero (0.00%) for 30 months, with inflation now showing signs of returning. Since November, Bernanke's been buying a full two-thirds of the Treasury's debt issuance. He's not going to raise interest rates anytime soon, which means inflation will accelerate, mostly through commodity prices. And when he stops buying Treasuries, where will that leave the investors? 

•The Inflation Conflagration: Inflation had been running at near zero because of the recession, but in the last six months the producer price index (PPI) has risen at an annual rate of 10%. That will feed into the consumer price index (CPI) over the next few months. At some point, bond buyers will realize inflation is back and panic. After all, even though inflation never got above 14% in the 1970s and 1980s, long-term bond yields got to 15%. For bond yields to move that high from here, bond prices would have to fall an awfully long way.

•The Federal-Deficit Follies: The real cost of the $787 billion "stimulus" of 2009 is the $1.6 trillion deficit we are now struggling with. The United States has never run a deficit of anywhere near this magnitude, and it's becoming obvious that trillion-dollar-plus deficits are here until at least 2013. That's another reason for the bond markets to panic - and is another reason to fear a bond market collapse.

Worse Than the 70s
Combine those three factors, and you're looking at the potential for a truly epic bond market collapse, worse than anything that we saw in the 1970s. After all, if bond yields rise 0.25% when the Fed is buying 70% of the bonds and keeping interest rates artificially low, those yields will experience a stratospheric zoom after June 30, when Bernanke's "QE2" bond-purchase program comes to an end. 

If you ask me to bet, I would say the bond market disaster will start in the third quarter - even CPI inflation figures are likely to be looking pretty creepy by then. Before then, you will probably see a continuing creep upwards in bond yields, perhaps reaching 4% on 10-year Treasuries by early June.

How to protect yourself? Well, obviously gold and silver are part of the solution, at least until the Fed starts fighting inflation properly, which I don't expect to happen before next year (for specific recommendations, see the "Actions to Take" section that follows).

The other solution is to bet on the bond market collapse itself. To do that, I'd recommend a look at the ProShares UltraShort Barclays 20+ Year Treasury Exchange Traded Fund (NYSE: TBT), which aims to rise by twice the amount that long-term Treasuries decline. Like all leveraged "inverse" funds, this accumulates tracking error if you hold it too long. However, I don't think we'll have to hold it for more than a few months this time, so the tracking error should be modest.

People have been predicting a sharp rise in bond yields for two years now, and they have been wrong. However, I think those predictions of a bond market collapse are likely to come true within the next few months, and when they do, they'll come true with a bang.

Actions to Take: Investors are looking at a bond market collapse, and it could start in the third quarter. But don't wait until then to adopt defensive investments. Start positioning yourself now.

The U.S. Federal Reserve's loose monetary policy and the inability of our elected representatives in Congress to rein in the U.S. debt load have undermined both the U.S. dollar and the nation's economic recovery.

There is no safe place to hide, but owning gold and other precious metals such as silver could go a long way toward preserving your wealth - at least until the Fed starts fighting inflation properly, which I don't expect to happen before next year.

In fact, I would recommend you haveat least 15% to 20% of your portfolio in gold and silver, the traditional inflation hedges. For detailed instructions on how to stock up on these metals see Money Morning's special reports: "How to Buy Gold" and "How to Buy Silver."

Of course, the short story is that both metals have exchange-traded funds (ETFs) that track their price fluctuations - namely the SPDR Gold Trust (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV). 

The other solution is to bet on the bond market collapse itself. To do that, I'd recommend a look at the ProShares UltraShort Barclays 20+ Year Treasury Exchange Traded Fund (NYSE: TBT), which aims to rise by twice the amount that long-term Treasuries decline. Like all leveraged "inverse" funds, this accumulates tracking error if you hold it too long. However, I don't think we'll have to hold it for more than a few months this time, so the tracking error should be modest.

[Editor's Note: There is a way for you to double your money in the next 12 months - and you don't have to hire a Swiss banker to do it. 

All you need is the right blend of high-yielding investments - and the right team of financial experts. 

And you can get both right here.

Gold and Silver: Supreme Safe Haven Assets

Silver (iShares Silver Trust (SLV)) hit the ball out of the park yesterday as it hit a record high exceeding my late January target of $40. Silver has doubled in the past seven months alone. Poor man's gold is making some poor men rich as the US dollar (PowerShares DB US Dollar Index Bullish (UUP)) and long term US debt (iShares Barclays 20+ Year Treas Bond (TLT)) remain under pressure. 

Think safe haven, particularly for the middle class citizens who sense that they are being caught between the rock of an out of control budget and the hard place of ineffective legislators posturing for the media. Silver (Proshares Ultra Silver (AGQ)) and gold (Proshares Ultra Gold (UGL)) are taking the reigns as the supreme safe haven asset.

Investing in silver presents an opportunity for the beleaguered middle class taxpayer to defend himself, while 50% of the population pays no taxes (and the same with corporate entities such as General Motors (GM) and General Electric (GE)). Gold (SPDR Gold Shares (GLD)) and silver provide a safe haven despite high prices because none of the budgetary, political and monetary concerns await resolution.

We hear of bubbles but gold and silver are still a small part of global financial assets. The price of gold in 1980 represented four times what it is today. China may be reentering the metals markets after taking a brief seventh-inning stretch adding impetus to the upward move in precious metals. Over 19 central banks were net buyers in the year 2010. This still leaves plenty of banks waiting in the wings. Gold supplies from scrap metals fell in 2010, while gold prices were higher, signifying that people are holding onto their scrap as they feel prices are going higher.

Protection against untenable fiscal imbalances and currency debasement is one of the few ways the middle class can defend themselves. Always remember that precious metals are on a long-term rising cycle and will remain a profitable focus for years to come. Often times the precious metals cycle moves slowly yet it bends upward. Long term US debt and the US dollar are in secular downtrends.

I am acutely aware that our valuable service has protected investors in this climate. Since the depths of the credit crisis, I have been alerting my readers to protect their assets through movement away from the US dollar and into the safe harbor of precious metals and natural resources.

There are many concerns about the falling dollar against the rising euro (CurrencyShares Euro Trust (FXE)) as this may put pressure on debt-ridden countries such as Greece, Portugal and Ireland. The question on the table is how should investors react in such a scenario. As the middle class loses buying power daily supporting corporate thieves and non-tax-paying entitlement brigands, we stand ready to monitor this situation on an hourly basis. If economic weakness occurs in the eurozone due to rapid currency appreciation you can be sure central banks will continue to ease liquidity into the system.

For the time being as we approach our measured targets in gold at $1600, it might be prudent to use this benchmark as a metric to dictate a commensurate sale. Playing with the house's money is a conservative position in a highly manipulated market. Remember: The Fed is answerable to no one, and with one stroke could cause a temporary short-lived sell-off in precious metals. Notice how Goldman Sachs this week came out with a bearish report on commodities. In yesteryear's markets this may have caused a prolonged decline, yet investors have shrugged off that report. Commodities have rebounded since that release.

One technique you can use to secure these hard-earned gains is to follow the 20-day moving average, which has historically proven to be an excellent short-term indicator as a trailing stop loss. If gold or silver breaks below the 20-day or short-term trend, then one can secure profits and not have to sit through a sell-off on the upward secular path.
I believe we are about halfway from the January buy signal to our $1600. My time frame is that precious metals should still see strength into the end of May or early June.

Metals Market Equations Are No Longer Simple

World events continue to signal support for hard assets, but caution is still advised. News in the copper space is as much about consolidation of the players as the metal itself right now. The $7 bid by China Minmetals for Equinox Minerals (EQN-T, ASX) has offered some support for other mid tier copper assets. The Minmetals bid requires EQN to drop its own bid for Lundin Mining (LUN-T, LUNMF-Q) that had already squelched the planned merger of LUN with Inmet Mining (INM-T, IEMMF-Q). EQN had already merged with an Australian junior to acquire its Saudi copper mine development that is to begin out put late this year. To this has just been added a take-over bid by Capstone Mining (CS-T, CSFFF-Q) for Far West (FWM-T, FWMLF-Q) and its copper-iron project in Chile, with an assist from state owned Korea Resources Corp. Small and mid tier copper producers are focused on securing growth assets of the right scale as Asia gets more aggressive in ensuring supplies for its markets.

That's enough to and fro for even the most ardent resource sector bears to give the sector another look. The interest in copper equities has contrasted with weakness for the metal's fundamentals. The three-market (LME, SHFE, COMEX) inventory levels for the red metal are back up to levels similar to those at the copper price low in March '09. The biggest build up through that period has been in Shanghai where stocks actually went negative in early '09. (Of note is that the SHFE now breaks out "bonded" metal which has been delivered to a Chinese port but hasn't had duties paid for entry.) This extra stockpile will work through the system in time, but it is large enough to have broadened the call for near term weakness in copper's price. The looming structural deficient in copper supply still has producers looking for near term additions to their output. That should continue to support copper assets with well defined cash flow potential. Near term weakness for the red metal can still be viewed as an aid to picking up asset rich deals.

Base metals and globally priced commodities more generally also continue to see support from US dollar weakness. Dollar weakness and inflation are somewhat perversely linked. At the start of the year many expected strength in the Dollar based on higher growth forecasts for the US. The rise of the Arab Street and $110+ oil prices changed the picture. If a ceasefire in Libya calmed that region the oil price at least may be less of an issue. That's still a big if. High oil prices definitely hurt in 2008 but much of the following recession was baked in the cake by the real estate bubble. Mayhem in the Arabic could generate a real time experiment on the breaking point from rising oil prices this go around.

News that tightening moves in China don't seem to be biting yet has added to concern on the oil, but in balance we think China will continue this tightening until they do. However, near term Euro strength may ironically have the most influence Dollar pricing.

The ongoing debt crisis in Euroland is one reason many expected the Greenback to keep strengthening, but Portugal finally succumbing to its debt reality caused barely a ripple in the markets. The amounts involved are small enough that the larger Euro economies should not have much trouble absorbing those costs. That is not yet the end of the story. It's widely assumed the next domino to fall could be Spain. The cost of a Spanish bailout would be an order of magnitude higher than Portugal, and the market would be much less sanguine about it. Spain continues to insist a bailout is unnecessary, as did Greece, Ireland and Portugal until right before they threw in the towel. Given this backdrop the strength in the Euro would be surprising except for one thing -- the European Central Bank.

The ECB has credibility as an inflation fighter. It raised interest rates again this month by 25 basis points and made it clear it would continue to if it sees evidence inflation continues to accelerate. This sort of credibility is the reason the Euro has been strengthening. The US Dollar Index has now reached new 52 week lows, largely due to Euro strength.

Inflation is also rising in the US, but messages out of the Fed and Washington politicos are as mixed and contradictory as ever. While it seems unlikely there is the political will or necessity to institute "QE3", it's equally unlikely the US will follow Europe's lead with interest rate increases anytime soon. The US Fed tracks GDP price deflators and core inflation numbers that are still steady since they exclude food and energy. The "QE3" issue revolves around the lack of demand for US Treasuries. The Fed has been the buyer of last resort in the treasury market for some time now. PIMCO, the world's largest bond fund has sold what had been the biggest private holder of US treasury bonds, and gone short Treasuries.

The US Treasury yield did drop in March as the safety trade took hold, but that reversed fairly quickly as the markets started to normalize later in the month. During this period the Dollar itself barely benefited from the safety trade. There was some uptick as rates moved up but this soon dissipated and reversed. Despite worry about bonds selling off, Treasuries are still a parking spot for funds. That might change with another interest rate gain in Europe. If that happens PIMCO would have lots of company on the short side of US Treasuries.

Meanwhile, China still refuses to let its currency appreciate. And, recent economic stats increase the likelihood of more rate increases there. China's Q1 trade statistics were headlined with a trade deficit, the first in years, but the numbers for March indicate strong gains for both imports and exports and a small trade surplus for the month. Numbers like these indicate China is still the world's widget maker.

Like the ECB, Beijing is serious about tackling inflation so more interest and reserve ratio increases seem certain. The Yuan should be gaining while this tightening continues, but Beijing still seems to be more concerned about losing sales than allowing a stronger currency to knock down import costs and help cool inflation. With China trade so important these days, that eats into everyone else's wiggle room.

Assumptions that the US Fed will avoid raising rates to fight inflation are none the less still quite rational. Moderate inflation debases US debt, and it's simply not that easy to argue with the world's biggest debtor. The US will try to maintain a negative real interest rate policy for at least the rest of this year. As long as the market is letting them get away with not spiking Treasury yields it makes no sense for the Fed to change tack -- unless forced to.

More hawkish central banks trying to stay ahead of the inflation curve will continue to attract bond holders. This will maintain a benign environment for metals and other commodities, even if it does not push them to higher prices. However, as rates outside the US move higher it will become more difficult for Washington to roll over its debt without following suite. The S&P downgrade of US debt recognized that simple truth. We aren't yet at that point of concern and may not be soon, but it has potential to be turning point when it takes place.

Gold and silver have continued barreling higher thanks to insurance buying, inflation expectations, and the currency picture. Given the underlying chaos in global affairs there is room for gold and silver to continue their gains, in US Dollar terms at least, as long as negative real rates persist in the US. Around that upward bias will be traders moving in and out of the safety trade and other short term sentiments. Expect volatility.
Gold's advance has been fairly measured, with plenty of consolidation along the way. Pullbacks have been few lately in the silver market. Silver looks technically stronger, but it will be prone to sharp pull backs given the large one way move it has already had. Silver's strength has shifted a number of companies we follow from being gold dominant to silver dominant just as they are reaching cash-flow waypoints. These are safer ways to play silver after its strong gain, so they have been getting some emphasis in our updates to subscribers. We are looking at a few exploration stories that may offer better silver leverage, but we do so cautiously. Market shifts can impact smaller metal markets swiftly, and unpredictably.

What's Behind the Crude Oil Spike to $112 and Why There's More to Come

Kent Moors, Ph.D. writes: Crude oil prices rose for the third straight day yesterday (Thursday) - with more of the same to come.

West Texas Intermediate (WTI) crude for June delivery rose to $111.50 a barrel on the New York Mercantile Exchange, and traded as high as $112.48, the highest intraday price since April 11. Crude prices are up by a full third so far this year.

Brent crude is trading at $123.70 a barrel on the ICE Futures Europe exchange in London.

The latest surge in oil prices is not a result of new geopolitical developments - although they continue to weigh on the market.

Nor is it a result of any short-term inventory problems in either the United States or Western Europe. In fact, available supply of both crude oil and finished products continues to run considerably above five-year averages. American stockpiles are now at multi-year highs.

This spike is our introduction to a very quickly changing oil sector - one in which demand is coming from new quarters, and concerns are increasing over sufficient balance among regions.

The New "Oil Dynamic"
It has been some time since the Organization for Economic Cooperation and Development (OECD) countries - essentially Europe, North America, Australia, Korea, and Japan - have actually controlled this market. Demand now comes from developing, not developed, economies.

This has created a new oil dynamic that is playing an increasingly growing role in crude oil prices.

What occurs on a day-to-day basis in the United States - still the largest end-user market in the world - has a declining impact on price. This affects both crude oil and finished products such as gasoline, diesel, high-end kerosene (jet fuel), and low-sulfur heating oil.

There is an important point to remember from all of this: The global oil market is highly integrated.

Regardless of how much surplus inventory may exist in an individual national economy, prices for gasoline (or diesel or heating oil or jet fuel) are still fundamentally driven by what occurs elsewhere in the world.

Neither "Drill, baby, drill" nor "Fortress America" will have the impact their proponents anticipate. In fact, the idea that domestic crude oil can reduce gasoline prices is fundamentally incorrect.

Domestic crude is considerably more expensive to extract than oil imported from elsewhere. And since the cost of crude oil is the single-largest component in the cost of refining, having the source closer to home does not translate into less-expensive refined products.

Now if this had been a national-security argument, pricing considerations would take a secondary seat.

If we were talking about a national security strategy, the objective is to bring crude oil supplies under control; price is not a consideration.

If Americans were to accept paying more at the pump (and we are talking way more here - well over $5 a gallon, as we will see in a moment) as a necessary cost of weaning ourselves from Middle East sourcing, then the solution would be simple.

Unfortunately, it is the pricing side that captures the attention.

And if we are concerned with the price of oil and gasoline, diesel fuel and other fuels, with the net impact of rising oil prices on the U.S. economic recovery, and the risk that those higher costs pose to U.S. jobs, the American tax base, and the country's industrial infrastructure, then importing from abroad becomes the cheaper option. 

The security/pricing tradeoff is both the most all-encompassing and the most politically misused element in the entire energy debate.

Yet it does bring the real issue into focus.

Domestic Crude Oil Production Is Unrealistic
An important rule of thumb holds that each $1 increase in the price of a barrel of crude oil translates, on average, into a 2.5-cent increase at the pump for a gallon of regular gasoline, and an increase of as much as 3.2 cents for a gallon of diesel.

Let me put into perspective what this means for domestic U.S. production.

During the second week of July 2008, when oil prices hit $147.27 a barrel, with gasoline costing an average of more than $4.20 a gallon nationwide (and diesel more than $4.60 per gallon), there were more than 360,000 capped wells in West Texas. And those wells held, in aggregate, millions of barrels of crude oil.

But even with oil at $147.27, it was too expensive to open them up. These are "stripper wells," the source of more than 60% of the crude pumped daily in the U.S. market. Each well provides less than 10 barrels of oil a day, but upwards to 200 barrels of water.

And that disproportionately increases the cost of extraction.

At the time, I estimated it would take a price of $183 a barrel to make these wells profitable enough to allow an oil flow. That $35.73 price difference (between the actual record price of $147.27 and the required $183) would have catapulted gasoline prices to an average of $5.09 and diesel to $5.74 per gallon. And that was almost three years ago.

It is little wonder, then, that the United States is experiencing a rise in imported gasoline and other oil products. It is becoming cheaper to refine them abroad.

This is the real reason we will not see new refineries built in the American market.

The actual barriers to new refineries are not environmental regulations or "NIMBY" (not in my back yard) sentiment. Rather - even forgetting about the billions of dollars in expenses involved - it would take about a decade to bring a new refinery on-line from scratch. Well before that period expires, the more cost-effective approach is simply to import what additional oil product is needed.

So the current spike in oil prices is not an aberration. It is not because of events in Libya, or Syria or Bahrain or Egypt. It results from the built-in pricing problems of the market itself.

This will guarantee higher oil product prices, supported by a number of the other elements we have been discussing over the past 15 months.

A Look Forward
As another presidential election cycle begins, you need to keep this in mind. Political rhetoric aside, the gasoline-pricing issue - and the cost of crude oil - is not a result of Democrats, Republicans, Independents, Vegetarians, Reformed Druids, or any other political party or movement.
This comes from the oil market itself.

We will continue to bounce from crisis to crisis until we recognize this fact - and begin the genuine, difficult, exasperating, long and incredibly expensive process of moving from a crude-based economy to a more balanced energy model.

[Editor's Note: In today's essay, Dr. Kent Moors said that America must ultimately move from a crude-based economy to a more balanced energy model.

On one front, at least, we're already making strides. 

Indeed, one little American company is pioneering power conversion solutions for the renewable energy markets. Its newest technology is nothing less than a breakthrough that will finally bring solar energy squarely into the power-generation mix. 

But here's the stunner: You can still get shares for less than $4.

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