Bernanke Dollar Bottom or Crash!

By: Toby_Connor

Today's FOMC meeting and press conference has the potential to either put in a daily cycle bottom in the dollar index or initiate a waterfall decline into the dollar's three year cycle low. There is a lot riding on this meeting.

Let me explain. Today will be the 26th day of the current dollar cycle. That cycle typically lasts about 20-25 days. So it's already starting to stretch here. The last few days the dollar has been consolidating while it waits to hear what the Fed has to say. I suspect if the Fed clearly states it will close down QE2 in June that will give the dollar the impetus for another dead cat bounce. 

Make no mistake though; this will only be a dead cat bounce. Just because Bernanke ends QE2 in June doesn't cure the problem of the trillions of dollars he's already printed. The foolish attempt to print prosperity is going to have dire consequences; it is going to cause a dollar crisis. There's no way Bernanke can avoid that now. The damage has already been done. There's no way to push the toothpaste back in the tube.

In the event that the Fed does clearly state their intention to end QE (and I think this is the most likely scenario) the minor dollar rally should drive a continuing correction in gold and silver. They are due for a daily cycle correction. It will only be a correction though. The dollar catastrophe isn't done yet and Gold's C-wave still has further to go (a lot further).

The other scenario, and the one I think is less likely, is Bernanke doesn't state a clear intention to halt QE and the dollar tanks - thus initiating a final dollar crisis immediately. 

 
Only a Keynesian academic would think lasting prosperity can be created, with no unintended consequences, by printing money. But only an imbecile would risk sending the dollar over the cliff that it's hanging on. Bernanke had better say the right things this afternoon or all hell is going to break loose in the currency markets.

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Department of Energy (DOE) Energy Inventories

by Bespoke Investment Group

This morning's release of the weekly energy inventory report from the Department of Energy (DOE) showed that crude oil stockpiles increased by 6.2 mln barrels. This represents the largest weekly increase since July 2010. As shown in the chart below, this week's increase in oil stockpiles widened the gap between current and average levels even further. Not surprisingly, oil saw a knee jerk decline, but given the way this commodity has been trading don't be surprised to see it rebound as the day goes on.

While crude oil stockpiles continue to build, inventories of gasoline have seen a rapid decline. If you are wondering why gasoline prices are near record highs, even though oil remains well below its 2008 peak, look no further than the chart below. After starting off the year at above average levels, gasoline inventories are now below average for the first time this year.

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Stocks, U.S. Dollar, and VIX Not Anticipating Negative Reaction to Fed QE Meeting

By: Chris_Ciovacco

Experience tells us the best approach to this week’s Fed trifecta (meeting, statement, and press conference) is (a) to be patient, (b) wait for the news to come out, (c) monitor the market’s reaction, and (d) make any adjustments to our allocation if needed. From a contingency planning perspective, it is helpful to study the markets for clues that may foreshadow the reaction to Wednesday’s Fed statement and press briefing.

The Fed’s recent press release contains an important time change related to this week’s statement:

In 2011, the Chairman’s press briefings will be held at 2:15 p.m. following FOMC decisions scheduled on April 27, June 22 and November 2. The briefings will be broadcast live on the Federal Reserve’s website. For these meetings, the FOMC statement is expected to be released at around 12:30 p.m., one hour and forty-five minutes earlier than for other FOMC meetings.

From a fundamental perspective there are reasons to be nervous about the approaching end of the Fed’s second quantitative easing program (QE2) and possible policy changes to begin mopping up some of the liquidity in the financial system. As we originally presented on March 14, the chart below shows the stock market’s negative reaction to the completion of QE1.

For those who doubt whether the end of QE2 is a significant event, the chart below shows the S&P 500’s performance after Ben Bernanke’s August 27, 2010 Jackson Hole speech, which basically told the markets QE2 was on the way.

The table below shows where top-performing investments congregated post QE1 and after the Fed signaled QE2 (8/27/10 to 3/9/2011). The stark contrast between the left and right columns below tells us it is very important to look for a possible shift in risk appetite between now and the completion of QE2, which is scheduled to end in June.

The April 26 Wall Street Journal contained several articles about the end of QE2. The Journal highlighted our concerns as follows:

So far the Fed has bought $548 billion worth of Treasurys under QE2, according to a Barclays Capital tally, with maturities ranging from 1 1/2 to 30 years, and inflation-protected securities as well. The buying has made up more than 85% of the net $638 billion of bonds the government sold between November and March (Article).

“When QE2 ends in June, then $1.5 trillion worth of check-writing per year basically disappears,” says William Gross, who oversees the $1.2 trillion portfolio of Pacific Investment Management Co. “It will be a big event.” (Article)

Given all of the above, you would guess the stock market, dollar, and VIX would be sending signals foreshadowing a shift in risk appetite. While these signals may still emerge in the coming days and weeks, thus far, no such signals exist.

The stock market had an opportunity to “beat the Fed rush, and sell off early” on April 18 when Standard and Poor’s (S&P) moved to a negative outlook on U.S. debt. As we noted on April 19, the market’s sell-off following the S&P announcement was not as bad as it appeared. Since the low of 1,294 on April 18, the S&P 500 Index has tacked on 41 points. 

Shifting to simple support and resistance, the monthly chart of the S&P 500 below shows a market that has held above several key levels during the March pullback and following the S&P’s negative shift on U.S. debt. As we noted back on March 22, a move toward 1,400 on the S&P 500 is not out of the question.

We have shown the longer-term chart of the S&P 500 below several times in 2011. The market bounced off the upper pink trendline early in the year in a bearish fashion (see orange arrow). Since then, stocks have clawed their way back from the March 16 intraday low of 1,249. The S&P 500 is now knocking on the upper-pink trendline’s door for the third time. This bullish resilience is impressive in the S&P’s debt wake and with the end of QE2 in sight.

When the markets are sending mixed signals or an advance appears questionable, as the current one does, it is helpful to take a step back and examine things from a longer-term perspective. The monthly chart of the S&P 500 below tells us to respect the possibility of bullish outcomes despite our Fed-related concerns. The top portion of the chart shows the Relative Strength Index (RSI). The S&P 500’s monthly RSI remains in a bullish trend channel. RSI has also recently cleared a point of possible resistance. If we compare point A to point B, we see RSI has exceeded the level at point A.

Staying with the chart above, the bullish pink trendline from the March 2009 lows was established near point C. The trendline has thus far been able to act as support for prices near point D. A bearish break of the pink trendline in the coming days and weeks could open the door to a pullback below 1,249.

If we look for bearish clues in the currency markets, nothing jumps out in an obvious manner foreshadowing a possible “safe-haven” rally in the U.S. Dollar. One clue that may, emphasis on may, help us prepare for a possible change in trend is the presence of divergences between an indicator, such as RSI, and price. A bullish or positive divergence occurs when price makes a lower low and an indicator makes a higher low. 

Bullish divergences often are followed by rallies. As of the April 25 close, there are no divergences between the price of the U.S. dollar and two indicators commonly used to spot divergences, RSI (see top) and MACD Histogram (see bottom). This does not mean that the dollar will not or cannot rally; it simply means there is nothing currently present suggesting that a rally is imminent.

The April 25 Wall Street Journal also commented on the market’s expectations on interest rates, which leave the door open to further weakness in the dollar:

Markets currently anticipate the Fed will move to tighten credit at the very end of this year or early next. The economy, in other words, will remain awash in cheap credit. That view has helped to power the stock market recently.

The VIX is commonly referred to on Wall Street as the “Fear Index”. The VIX tends to rise, and rise rapidly, when the markets experience a period of risk aversion. Like the dollar, there are no obvious divergences on the weekly chart of the VIX to suggest a period of risk aversion is imminent. The VIX may well stage a furious rally in the coming weeks, but divergences are not there to support such a move.

While nothing yet is all that alarming relative to our concerns about a possible change in risk appetite, the tentative move off the March 16 low, the April 27 Fed events, and expiration of QE2 warrant a close watch on our long positions, especially those in energy (XLE), commodities (DBC), precious metals (SLV), and materials (XLB). If evidence of a shift in the market’s tone surfaces, we will monitor the interest in more defensive-oriented positions, such as consumer staples (XLP), utilities (XLU), and bonds (AGG). Unlike the deflationary-scare-induced correction in 2010, the next bearish episode may be accompanied by a spike in interest rates, bringing into question the safe-haven status of utilities and bonds. If we pay attention with an open and unbiased-mind, the market’s longer-term reaction to the Fed and the end of QE2 will become clearer over the coming days and weeks.

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Silver Top or Not?

By: Przemyslaw_Radomski

When gold hit the psychologically important $1,500 level it didn't surprise us, but we admit that silver’s recent performance gave us a small thrill. Before jumping into the chart analysis, let’s have a look into the factors that contributed to metals’ spectacular rally over the past couple of weeks. 

For the first time in its history the U.S.'s perfect AAA credit rating was downgraded, and for the first time in history, gold hit the $1,500-an-ounce mark. Also, the news over the week end of a $1 billion gold bullion purchase by one of the largest college endowment funds sent a strong message about gold’s re-emergence as a respected, legitimate asset class.

Now that gold futures have traded above the psychologically important $1,500 level, some are wondering if gold's trajectory will continue or slow down. It is interesting to notice how the two biggest holders of U.S Treasury securities reacted to the news. Japan downplayed concerns about the creditworthiness of the U.S. giving Treasuries a vote of confidence, while China didn't even try to veil its worry. “We hope the US government will take responsible policies and measures to safeguard investors’ interests,” said China's foreign minister.

China has plenty of reasons to be worried. It is the largest foreign owner of US Treasuries with $1,154.1bn. in US Treasuries ahead of Japan’s $890.3bn. The Federal Reserve is the largest overall holder of US Treasuries with $1,368bn on its books. The sheer size of China’s reserves means there are no other asset markets in the world large or liquid enough (certainly not gold) for China to stash its increasing cash pile.

As the United States and Europe struggle to get their economies rolling again, China is having the opposite problem: figuring out how to keep its revved-up growth engine from generating runaway inflation.

The latest sign that things are overheating came when China’s central bank ordered the biggest banks to set aside more cash reserves to reduce the amount of money available for loans. This is an attempt to cool down the economy. It follows the announcement on Friday that China’s economy was growing at an annual rate of 9.7 percent, by far the strongest performance by any of the world’s biggest economies. It goes without saying that money problems in China can reverberate loud and clear the world over. High inflation endangers China’s status as the world's low-cost workshop for the world. The only tool central banks have to fight inflation is to rate key interest rates, something they have to do very carefully so as not choke off growth. But the difficult part is that inflation is rising faster than interest rates creating a perpetual negative real interest rate environment (interest rate minus inflation), which means your dollar in the bank is worth less. As paper currencies lose value, gold shines brightly as a store of wealth. 

Still, let’s keep in mind that fundamental factors, as the ones mentioned above drive markets in the long term, but emotions determine the short-term outcome. Consequently, it’s of utmost importance to supplement fundamental knowledge with proper chart analysis. Today we will feature two important charts. Let’s start with the long-term gold chart (charts courtesy by http://stockcharts.com.)

Considering the recent performance, gold’s price has risen significantly, but, more importantly, gold has reached the $1,500 target level we have been writing about for several weeks now. This is an important resistance level, but the most important one is the upper border of the rising trend channel (marked with thick blue line). 

A general rule of thumb regarding major long-term breakouts is that they should be visible here in the very long-term chart (that’s a rough approximation of the three-consecutive-trading-days-above-the-line rule). As you can see, gold appears to have reached this resistance line. The situation is tense at this time and will remain so until gold moves decisively either to higher price levels or back below the $1,500 level.

Overall, two resistance lines are in play and we are roughly few dollars away from our target level in spot gold. Extreme caution should be exercised at this time. Still, at this point it seems that the emphasis should not be put on the analysis of gold, but on silver. In this essay we will examine the situation in silver through the silver:gold ratio.

In the Silver:Gold ratio chart, we begin with a look back to what was stated in our Premium Update April 15th 2011. We said that the ratio has not yet reached the very long-term resistance line. This upper border of the trading channel (marked with red) will likely be the point at which the ratio reaches its next local top. This will serve as a confirmation that once this resistance line is reached, the short-term rally for silver and gold will likely end.

About two weeks ago, the Silver:Gold ratio was in the middle of the trading range. Since that time, silver has clearly outperformed gold and the ratio has quickly approached the upper border of the trading channel. The speed in which this took place was unexpected and has likely brought us closer to the end of the current rally more quickly than seemed probable. Is the current rally in silver over? The situation is quite complicated and has different implications for Traders and Investors, however we believe the top for this rally is most likely in. 

As we’ve mentioned before, the above ratio is likely the key to properly timing the gold and silver markets at the current juncture and the key target – upper border of the rising trend channel – has been reached. 

Summing up, the past eight months have seen a virtually meteoric rise in silver’s price, but it seems that the white metals and also the rest of the precious metals sector have already begun its corrective phase.

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Gold and Silver Correction Possible but Store of Value Demand Remains

By: GoldCore

Silver and gold are lower today after the record nominal highs seen yesterday (gold marginally and silver significantly). Gold reached $1,518.30 per troy ounce, a nominal record, while silver climbed to $49.79 per ounce, its highest nominal level since the short term parabolic spike in 1980. 

Gold in USD - 10 Day (Tick) 

A period of correction and consolidation has been expected for some time and it may ensue as gold and particularly silver are overbought in the short term. However, absolutely nothing has changed with regard the primary fundamentals driving the gold and silver markets. 

Ultra loose monetary policies are set to continue with Ben Bernanke, Federal Reserve chairman, to announce the conclusions of the Fed's monthly meeting to set monetary policy. Interest rates are set to remain near zero percent which will lead to many investors continuing to favour non-yielding gold due to the lack of opportunity cost. 

Silver in USD - 10 Day (Tick) 

Near zero percent interest rates and negative real interest rates as inflationary pressures grow are of course bullish for gold and silver and investors would be prudent to buy any dip. 

Contrary to non-evidence based assertions that the recent price gains were purely due to “speculation”, recent rises are largely due to supply and demand fundamentals. The rises are primarily due to increased and robust physical demand for the precious metals due to inflation concerns, concerns about the debasement of the dollar, the euro and paper currencies, sovereign debt and geopolitical concerns. 

These concerns are not going to disappear overnight and indeed are likely to intensify in the coming months with consequent financial and monetary ramifications. Inflation hedging and store of value buying of precious metals, especially from China, India and Asia, in set to continue for the foreseeable future (see news below). 

Greek 10 Year Bond - 180 Day (Daily) 

Greek bonds have fallen again on news that the Greek budget deficit was wider than expected and on deepening concerns of an inevitable default. 

Euro-area debt reached a record in 2010, Eurostat said today, making it harder for Germany, France and the Eurozone’s better-off countries to bear the costs of the fiscal crisis triggered by Greece, Portugal, Spain and Ireland. Debt rose in all 16 euro-region countries, lifting the bloc’s average to 85.1 percent of GDP from 79.3 percent in 2009. 

Gold in EUR - 1 Year (Daily) 

The euro zone debt crisis is far from over and the risk of contagion remains very real. The euro, like other fiat currencies, is vulnerable to falling sharply against the finite currency of gold in the coming months.

Gold
Gold is trading at $1,502.65/oz, €1,028.79/oz and £911.80/oz.

Silver
Silver is trading at $45.52/oz, €31.17/oz and £27.62/oz.

Platinum Group Metals
Platinum is trading at $1,809.50/oz, palladium at $748/oz and rhodium at $2,250/oz. 

News
(Financial Times) -- Precious metals cool after reaching highs
Precious metals weakened after touching highs as investors sought substitutes for paper currencies. 

Gold reached $1,518.10 per troy ounce, a nominal record, while silver climbed to $49.31 per ounce, its highest level since a supply squeeze in 1980. 

Trading was light in the spot market because of a bank holiday in London, the bullion centre. Spot gold pared gains to $1,509.51 per ounce, while silver was up 1.7 per cent at $47.48 per ounce. 

Silver futures traded furiously on New York’s Comex exchange, however. Volume in the iShares Silver Trust, a $17bn US exchange-traded fund, surpassed share volume in the much larger SPDR S&P 500 stock fund.

Precious metals prices have surged as investors search for havens from a variety of risks, from inflation and weaker currencies to political turmoil. 

“There’s been a resumption of sovereign risk worries in Europe, safe haven buying related to Japan and more recently, discussions over US debt,” said James Steel, precious metals analyst at HSBC in New York.

Silver, at a fraction of the gold price, has prompted individual investors to buy coins and exchange-traded funds. The grey metal has gained more than 160 per cent in the past year. 

Suki Cooper, precious metals analyst at Barclays Capital, said: “Should that retail interest in silver slow down just a little bit, we would expect prices to correct quite sharply.” 

The market considers $50 an ounce as the record nominal high for silver, although veteran traders say that in the chaotic trading of January 18, 1980, some small amounts changed hands in the physical market at higher prices. 

(Bloomberg) -- Gold, Silver Decline From All-Time Highs as Investors Seek Cash
Gold and silver retreated from records as some investors sold the metals to lock in gains and raise cash to cover losses in other markets. 

The MSCI Asia Pacific Index of equities declined for a second day today, after the Standard & Poor’s 500 Index yesterday dropped for the first day in four. Commodities snapped a four-day winning streak, led by crude oil and copper. 

“Initial dollar-related profit-taking saw the precious complex down,” James Moore, an analyst at TheBullionDesk.com in London, said in a report to clients today. “Given the pace and scale of gains in gold and silver in recent weeks there is the threat of a deeper correction in the coming sessions, particularly if the FOMC minutes tomorrow indicate the Fed is close to starting monetary tightening.” 

Bullion for immediate delivery dropped as much as 0.8 percent to $1,495.75 an ounce and traded at $1,504.43 by 9:58 a.m. in London. It climbed to an all-time high of $1,518.32 an ounce yesterday. Gold for June delivery fell 0.3 percent to

$1,505 an ounce on the Comex in New York. Silver tumbled as much as 4.8 percent to $44.6625 an ounce before trading at $45.9125. Spot silver rose to a record $49.79 an ounce yesterday. 

Federal Reserve Chairman Ben S. Bernanke will hold a media conference after the Federal Open Market Committee statement tomorrow following a two-day meeting in Washington, where policy makers are expected to keep borrowing costs near zero. 

The dollar advanced by as much as 0.6 percent against the euro earlier today, before trading 0.3 percent lower. Bullion typically moves inversely to the greenback. The U.S. currency gained as much as 0.5 percent before declining 0.2 percent against a basket of six currencies. 

‘Possible Event Risk’
“The Federal Reserve meeting is a possible event risk but we expect that Ben Bernanke in its first public speech post-meeting will confirm that U.S. short-term rates are most likely to stay low,” Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland, said in an e-mail. “This confirmation of low nominal rates combined with higher inflation will be positive for gold.” 

A correction in gold and silver price is unlikely to last more than three days, Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter, said in a daily report. 

“It’s more the action in silver that’s making me a little queasy,” Charles De Vaulx, a manager at International Value Advisers LLC, said in an interview yesterday with Margaret Brennan on Bloomberg Television’s “InBusiness.” “It’s a much smaller market than gold, there’s anecdotal evidence that some silver-based, closed-end funds are even trading at a premium, so it seems to have become a lot too speculative.” 

Silver holdings in the iShares Silver Trust, the biggest exchange-traded fund backed by silver, climbed 239.76 metric tons to a record 11,390.06 tons as of April 25 from 11,150.30 tons on April 21, according to figures on the company’s website. 

Platinum lost 0.8 percent to $1,809.75 an ounce in London, while palladium declined 0.9 percent to $754.25 an ounce. 

(Bloomberg) -- Investor ‘Euphoria’ to Spur India Silver Demand, Bourse Says
Silver demand in India will climb this year as investors boost purchases on expectation that prices will extend a record rally, according to the National Spot Exchange Ltd. 

Demand will gain “at least 10 percent to 15 percent” from the current level of about 3,000 metric tons a year, said Anjani Sinha, chief executive officer of the Mumbai-based bourse. The exchange is the biggest in India for trading physical gold and offers spot contracts for silver, zinc and copper. 

Silver surged to an all-time high of $49.79 an ounce yesterday as investors sought to protect their wealth against accelerating inflation and a weaker dollar. The metal, which has more than doubled in the past year, is the best performer on the Standard & Poor’s GSCI Index of 24 commodities.

“A new euphoria is there among the investors to buy silver,” Sinha said in a phone interview yesterday. “People in India have started believing it will go up further, so demand has picked up very well.” 

Silver futures in India, which reached a record 73,600 rupees ($1,655) a kilogram yesterday, plunged as much as 5.3 percent on the Multi Commodity Exchange of India Ltd. today. Silver joined a slump in global commodities from oil to gold and grain, as the dollar rebounded and some investors sold the metal to lock in gains. 

Global silver demand climbed 15 percent to 1.06 billion ounces last year, the highest level in at least 20 years, as investment jumped to a record and industrial usage rebounded from a five-year low, researcher GFMS Ltd. said in a report published by the Washington-based Silver Institute on April 7. 

‘Rushing for More’
“Physical silver is on fire, so people are rushing for more,” said Ketan Shroff, managing director of Pushpak Bullions Pvt. in Mumbai. “People are very bullish on silver.” 

Silver trading on the National Spot Exchange has increased at least 20 percent in the past month, Sinha said. Prices may reach 100,000 rupees per kilogram in the next three to six months, he said. 

Silver’s relative cheapness to gold is spurring some investors to favor the metal over bullion. The ratio of gold to silver dropped to the lowest level since September 1980 yesterday. An ounce of gold bought 32.9 ounces of silver today, according to data compiled by Bloomberg. 

“People are feeling more comfortable to buy silver and sell gold,” said Pushpak’s Shroff. “There’s a little bit of selling in gold and physical-silver buying.” 

Futures Tumble
Silver for immediate delivery tumbled as much as 4.8 percent to $44.6625 an ounce and traded at $45.2887 at 10:10 a.m. in Mumbai. Gold for immediate delivery dropped as much as 0.8 percent to $1,495.75 an ounce today. The metal climbed to an all-time high of $1,518.32 yesterday. 

“The recent rise in the silver price has been too sharp in too small a timeframe and we could see some correction in prices,” Pritam Kumar Patnaik, vice president sales, Kotak Commodity Services Ltd., said by e-mail. “The current upward momentum will push silver to new all time high above $50 an ounce but we could see some correction in the near term.” 

(Bloomberg) -- Silver, Gold Rise to Records on Bets China’s Demand Will Climb
Silver and gold surged to records in London on speculation that China will buy precious metals to diversify its foreign-exchange reserves. 

China, with more than $3 trillion in reserves, plans set up new funds to invest in energy and precious metals, Century Weekly magazine reported, citing unidentified people. Silver for immediate delivery surged to a record $49.79 an ounce, and gold reached $1,518.32 an ounce. 

“People are expecting China to be a major buyer of precious metals,” said Adam Klopfenstein, a senior strategist at Lind-Waldock in Chicago. “Gold is piggybacking on silver. 

You’re seeing a blowoff rally in silver, but we don’t know when the bubble gets popped.” 

On the Comex in New York, silver futures for July delivery rose $1.096, or 2.4 percent, to settle at $47.173 at 1:59 p.m. Earlier, the price climbed as much as 8.2 percent to $49.845. 

The metal reached a record $50.35 in January 1980 as the Hunt Brothers tried to corner the market.

Spot silver jumped as much as 5.4 percent and fell as much as 3 percent. 

Gold futures for June delivery rose $5.30, or 0.4 percent, to $1,509.10, after climbing to a record $1,519.20. The spot price advanced as much as 0.8 percent. 

Commodities have reached the highest since 2008, partly on demand for a hedge against inflation. Gold and silver have rallied amid sovereign-debt concerns in the U.S. and Europe. Silver has posted the biggest gain in 2011 among 19 raw materials in the Thomson Reuters/Jefferies CRB Index. 

Rate Outlook
The dollar has dropped for four straight weeks against a basket of major currencies. The Federal Reserve may keep borrowing costs at zero percent to 0.25 percent, while European Central Bank officials signal further rate increases. Fed Chairman Ben S. Bernanke will hold a media conference after the Federal Open Market Committee statement on April 27 following a two-day meeting in Washington. 

“The disdain for currencies generally and the need to embrace precious metals is still very strong,” said Dennis Gartman, an economist and the editor of the Suffolk, Virginia- based Gartman Letter.

Before today, spot silver more than doubled in the past year, while gold increased 32 percent. 

“Silver in the long run really will end up in a bloodbath, but in the short term, the market loves it,” Dominic Schnider, a Singapore based director of wealth-management research for UBS AG, said today in a Bloomberg Television interview. The commodity’s 14-day relative-strength index, which may signal a decline above 70, was over 89. 

Investment Demand
Investment demand for silver climbed 40 percent to a record in 2010, and fabrication use jumped to a 10-year high, GFMS Ltd. said in an April report published by the Washington-based Silver Institute. Assets held in exchanged-traded products rose to a record 15,509.54 metric tons on April 12, data compiled by Bloomberg from four providers shows. “Silver is definitely benefiting from spillover demand from gold as a haven investment,” said Li Ning, an analyst at China International Futures (Shanghai) Co. Silver also is found in products from solar panels to plasma screens and chemical catalysts. 

(Bloomberg) -- Dim Dollar Outlook to Spur Gold Rally, WJB Capital’s Roque Says
The outlook for the dollar remains bearish, which means gold prices will keep rising from today’s record, according to John Roque, a managing director at WJB Capital Group Inc. 

“People want to know the target for gold, and our response is: How low can the dollar go?” Roque said today in a television interview with Tom Keene on “Bloomberg Surveillance.” “We just think that the trend is up, and we’re just going to stick with it.” 

Spot gold touched an all-time high today of $1,518.32 an ounce in London. On the Comex in New York, gold futures touched a record $1,519.20 an ounce. 

(Bloomberg) -- Swiss Platinum Imports Were 3,350 Kilps in March, Customs Says
Switzerland’s platinum imports were 3,350 kilograms in March compared with 3,619 kilograms in February, according to the Swiss Federal Customs Administration.

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Sociapitalism: How the Government Became the Next Bubble

By: Jason_Kaspar

In the last thirteen years, a new financial order replaced capitalism in America. With cat-like tread, this transformation has caught most Americans unaware, let alone some of country’s best financial minds (many of them fascist anyway).

This new order constitutes the socializing of risk, a concept I have termed: Sociapitalism.

Sociapitalism is different than Social Capitalism – a European concept. Social capitalism is the redistribution of wealth through social programs, such as unemployment benefits, food stamps, and government housing. Sociapitalism is not a redistribution of wealth, but a redistribution of risk. The government transfers risk from one entity to the system, securing the safety of the entity. 

Social capitalism allows corporate failure. Sociapitalism does not, reducing the only possibility of failure to the sovereign state.

For the most part, our country was founded on the principle that success or failure should be predicated on one’s own merits. The weak died, the strong survived. Depressions and recessions cleansed the system, firming up the foundation for the next economic advancement. Capitalism brought corruption – true - but that corruption was eventually punished with failure. Failure distinguishes capitalism from all other economic systems.

That model has changed, and it became visibly apparent in 1998 when the government orchestrated the bailout of Long Term Capital Management. In hindsight, this intervention may have been the biggest mistake in American financial history. If Long Term Capital Management would have failed, Lehman Brothers would have likely failed at that time, and the United States would have fallen into a recession. Positively, the United States would have averted an equity bubble, Glass Steagall would have never been repealed, and the system would have been cleansed from the froth of the late nineties.

Instead, the orchestrated bailout of Long Term Capital Management ushered in the biggest equity bubble (in terms of valuation) in the history of the United States. The collapse of this tech bubble did wipe out large deposits of wealth, but valuations never corrected to the long term historical mean because the U.S. government buttressed the system by creating a private debt bubble. This intervention served to bail out the equity collapse. The private debt bubble instigated a handful of asset bubbles primarily centered on real estate.

In 2007, as we all know by now, this real estate bubble finally began to deflate, taking much of the private debt bubble with it, and forcing a collapse of the entire private market – equity and debt. The private market needed to collapse; it needed the long overdue cleansing it did not receive in 1998 or in 2003. Instead, beginning in 2008, the biggest government intervention in U.S.

history prevented the market cleansing once again, and it has subsequently led to the final bubble – the government bubble.

Like the private debt market bubble which supported equity valuations, the government bubble is now propping up equity market valuations and the private debt market. I fully realize that the world would be in a full depression had the United States not intervened, but I firmly believe the consequences of the latest intervention will only prolong and increase the inevitable misery. At each interval, the ante has increased; the pressure has been notched ever higher. The U.S. needed a slight recession in 1998; in lieu of that recession, the country needed a severe recession in 2002; without that severe recession, it needed a depression in 2008.

Now, the system has been put at risk.

Over the last two years, the government has supported virtually every private sector function. Through extension of unemployment benefits, home buying tax credits, cash for clunkers, build America bonds, quantitative easing, and myriad other programs, the government has propped up the private sector. Once the support structure surpasses the point of sustainability, the private sector will likely collapse along with the system. Where previously an American business’s success had been self-determining, its success is now predicated upon the outcomes of the domestic collective. This risk is pervasive; a family owned restaurant in rural Texas, muni bonds, government bonds, equities, commodities, a new venture in Vietnam . . . all share in the risk of the collective.

As an example of how the economic model has changed, my great-great-grandfather started a manufacturing company in 1898 that employs to this day hundreds of Americans. It has survived because of successful calculations in business risks and a robust understanding of the business cycle. Its tenure spans twenty recessions, one depression, two world wars, oil embargos, steel shortages, and twenty presidential administrations. It has achieved its longevity largely by avoiding debt and making very conservative business decisions.

One hundred and thirteen years later, the company’s future depends almost strictly on forces outside its control. It now shares risk with companies like Citigroup, Wachovia, Wells Fargo, and General Electric, since the risk of these companies has been transferred to taxpaying entities through massive government leveraging. Not only is this redistribution of risk anti-American, it is potentially hazardous to the whole because of coupling in the system.

Historically, if a company failed, there might be losses, but American capitalism contained the damage. Capitalism acted like an emergency brake on an assembly line.

Conversely, the government has created an environment where excess risk is allowed to flourish without penalty. Now we have a new bubble, a government bubble; one that will end all bubbles for decades to come.

Homebuilders: A Prime Example

Yesterday, the Census Bureau reported New Homes Sales on a seasonally adjusted basis. The first three months of this year witnessed the fewest home sales since 1962, the first year records were kept.

One might conclude that stocks of homebuilders would approach the historical lows of the last ten years, or have at least bottomed six months ago anticipating this might be the worst print. Not only has housing not bottomed, homebuilders are instead UP over 100% since their lows in November of 2008 and March of 2009. You can see this in the XHB etf (XHB also has building suppliers and retailers such as Home Depot). The system has salvaged companies like Hovnanian from the brink of Chapter 11. No longer is the mantra “only the strong survive” accurate, because weak companies have been pampered, accommodated, and allowed to flourish, creating over capacity and driving up risk across the system.

In my office, I have 75-page annual reports of Hovnanian, Toll Brothers, and DH Horton - three very large U.S. homebuilders. The reports are irrelevant; worthy of a good ol’ fashioned Texas bonfire. What matters is how far the U.S. government allows the homebuilders to extend tax losses backwards, how the U.S. 

government will support interest rates by keeping them artificially low, and what kind of home buying tax credit the U.S. government will offer its home buyers. System support now determines future success, and stock prices are uncorrelated to financial statements.

Investing Implications

What this means for investors is that valuations are presently converging. The riskiest companies/assets are individually worth more because their risk has been diluted. They have offloaded the risk with the safest assets, which in corollary means that the safest assets are intrinsically worth less. Netted together, the valuations should be substantially diminished when taking into account the coupling. Nevertheless, liquidity - and money managers whose careers began in the eighties and nineties when you always bought - have blinded the market.

Secondly, historically the majority of an asset’s risk has been unique to that asset. Now, many companies and many industries collectively share the majority of an asset’s risk. In years past, investing legends made fortunes by studying an individual asset and determining that its risk was mispriced. They were great handicappers. I believe that sociapitalism has rendered this skill inconsequential. There may be some mispricing on individual assets, but it is far outweighed by the mispricing of the risk connected to all assets, which means that all assets are overpriced in real terms.

Thirdly, the implications of the government bubble are dramatically different than those of previous bubbles. Since the risk is systemic, it is inherently impossible for asset owning investors to avoid it. When investors discovered that something was amiss with Bernie Madoff, they invested elsewhere through the thousands of other investment options. Likewise, during the equity bubble in 2000, an investor could diversify into other assets besides overpriced tech stocks. Today there are few, if any, viable alternatives.

Finally, when the risk is repriced, the only way to benefit is to bet directly against the group risk. There are very few vehicles for this purpose and even fewer for those who do not have tens of millions of dollars. 

Additionally, the U.S. government continues to blame market participants who anticipate the fallout, and its actions limit the ability for these participants to benefit from a repricing. The government is trying to ensure that there are no winners, while finding a scapegoat for its own sins.

When the government bubble pops, America will be changed forever.

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Comparing Prices: 2011 vs 2010

By Barry Ritholtz

Inflation is sure to be part of the discussion at the press conference with Chairman Bernanke today, which gives us yet another excuse to look at some chart porn.

Have a gander at the first graphic — its from the NYT, whose graphic department is usually pretty awesome:
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The original

click for larger graphic

Source: Behind the Rising Cost of Food (NYT)

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But even awesome can be improved upon; The above chart was the inspiration for an improved version from Flowing Data:
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New & Improved

click for larger graphic

Source: How much more we pay for stuff now than we did last year (Flowing Data)

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How the Fed Could Kill the U.S. Dollar Tomorrow

By: Money_Morning

Martin Hutchinson writes: Months or years from now, when analysts are studying the death of the U.S. dollar, they'll look back and see that the greenback's demise began on a specific day - Wednesday, April 27, 2011.

As in ... tomorrow.

At 12:15 p.m. tomorrow, at the conclusion of a two-day Federal Open Market Committee (FOMC) meeting, we'll find out whether U.S. Federal Reserve Chairman Ben S. Bernanke and his policymaking posse opted for a sharp increase in U.S. interest rates - which appears to me to be the only solution to a looming third-quarter crunch.

Unfortunately, I don't think that Bernanke & Co. will make the needed move.

And without that sharp rate increase tomorrow, investors can look forward to rampant inflation, an evisceration of the U.S. Treasury bond market and - in a worst-case scenario - the death of the dollar.

Let me show you why....

It's Time to Worry About the Death of the Dollar

For the last two years, the U.S. economy has been supported by the twin catalysts of fiscal and monetary stimuli.

Fiscal stimulus seems likely to continue for some time yet - even the most avid Tea Party budget cutters don't see their way to cutting more than $100 billion or so off this year's $1.6 trillion deficit.

But monetary stimulus is another matter.

The Fed's so-called "QE2" (quantitative easing/second round) purchases of U.S. Treasury bonds are supposed to come to a sharp end on June 30. That makes July a crucial month - for the American economy, for the country's bond markets and, most of all, for the performance of the dollar.

These crucial monetary-policy issues will be reviewed at the two-day policymaking FOMC meeting that begins today (Tuesday) and concludes tomorrow. Policymakers are expected to leave the benchmark Federal Funds target rate in its current range of 0.00% to 0.25%. 

If Bernanke wants to devise a "QE3" to follow his QE2, he needs to do it now: The next FOMC meeting is in late June, which is far too close to the expiration of QE2. 

The decision as to whether to end quantitative easing - or to extend it - will be a tough one, made no easier by the fact that there is a substantial-and-growing group in the FOMC that did not like QE2 and that will strongly resist a QE3. 

This "anti-easing" contingent has a strong case - and its arguments will be bolstered by figures that show inflation taking off. 

Bernanke can resist these arguments for a time - either by focusing on "core" inflation, which excludes food and energy, or by looking at the "Personal Consumption Expenditures" (PCE) deflator, which is reported a couple of months in arrears. However, even with only one additional set of data from the present, he may find it difficult to argue that inflation is no longer a problem - in which case QE3 will be impossible to launch.

And without QE3, the U.S. Treasury bond market will be in real trouble.

The Looming Third-Quarter "Crunch"

Since QE2 began in November, the Fed has been buying about two-thirds of the Treasury bonds issued - or about $600 billion of the $900 billion in total bonds to be issued between November and June.

April is a particularly favorable month for the government: Because of individual and corporate-tax payments, the net issuance this month may be around zero. July through September, on the other hand, will be big months for T-bond issuance - at least $150 billion per month is needed.

It could be a tricky time, however. Credit-rating heavyweight Standard & Poor's has threatened to cut the United States' top-tier credit rating: But Japan, the world's second-largest buyer of U.S. Treasuries, isn't likely to be in the market much at that time, as it will need the money for its own reconstruction program. 

Hence, expect to see a third-quarter crunch in the American Treasury market. The crunch will be made worse by the acceleration in inflation that is likely to occur between now and then: If inflation is running at, say, 0.50% per month - the equivalent of 6% per annum - by the summer, a 10-year Treasury bond yield of 3.5% will look untenable.

And so will a Federal Funds rate that remains close to zero.

The bond market won't be the only one to experience pain. The crunch we're predicting will also put a serious hurting on the currency market - specifically on the U.S. dollar.

If the U.S. government is trying to raise money that the markets don't want to give it, the U.S. dollar will decline on international exchanges, because of the continuing U.S. balance-of-payments deficit. 

Thus, a third-quarter Treasury bond crisis is likely to go hand-in-hand with a third-quarter dollar crisis, as markets start to treat the United States as they would the European "PIIGS" (Portugal, Ireland, Italy, Greece and Spain). Despite their struggles, most of those countries have sounder budget policies than this one, and all of them have sounder monetary policy, thanks to the European Central Bank (ECB).

Simply extending QE2, as Bernanke almost certainly wants, won't solve this problem. The Fed would then be buying both too much debt and not enough.

You see, Treasury bond purchases of $75 billion a month would be enough to push inflation sharply upwards: This is, after all, the very same policy that gave the German Weimar Republic its trillion-percent inflation. (See the accompanying graphic: "A Grim Reminder.")

On the other hand, even if the Fed buys $75 billion of Treasuries a month, the summer months will bring with them the need to place an additional $75 billion worth of bonds every month. And with inflation rapidly accelerating, the chances of a bond market and dollar crisis would still be great.

The One Way to Avoid the Death of the Dollar

With the U.S. market straining under the burden of rising inflation and some ill-advised monetary and fiscal moves, the death of the dollar is looming as a worst-case - but still possible - scenario.

The Fed has one chance to avoid this outcome. 

But it has to act tomorrow.

Just to have a chance of staying level with inflation. U.S. central bank policymakers must boost short-term interest rates at least to the 3% level. That would burst the global commodities bubble, and reduce inflationary pressures. 

With that accomplished, the Fed could then - if Bernanke & Co. wished - continue with a "modified QE3." For instance, perhaps it could buy $50 billion of bonds in the third quarter and $25 billion in the fourth quarter, thus breaking the Treasury bond market off its "Fed-bond-purchase fix," instead of making the market quit "cold turkey."

With inflationary pressure reduced by the interest-rate increase, the chances of a Treasury-bond-market meltdown would thus be reduced to almost zero. Interest rates would rise and bond prices would decline, but in an orderly manner. And inflation, if it continued, would do so at a more-moderate pace.

In fact, even inflation - should it remain stronger-than-desired - could be moderated, simply by raising rates a bit more, perhaps in several increments.

And the U.S. dollar would be saved.

There's only one problem with this scenario: I don't think it will happen. Bernanke won't boost rates. And we'll be back here sometime in the future, writing the epitaph for the death of the dollar.

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Silver Parabolic Move Was 5 Times Faster in 1980 than Today

By: Bob_Kirtley

This essay will attempt to address the question of whether or not silver prices are in a bubble, or possibly may be turning into a bubble and if so what trading strategies may be suited to the situation. This article will hopefully provide another string to the readers bow in attempting to identify bubbles and being able to protect one’s portfolio and even potentially profit from them. For the record we feel it is prudent to state our view upfront, we do not think silver is in a bubble at this point in time. However we think that it is likely that it will become a bubble in the future, but we cannot say when or at what price.

Asset price bubbles have occurred since the beginning of financial markets and will continue to do so as long as there remains a marketplace for assets to be traded. A key property of a bubble is that is it near impossible to identify with certainty before it pops, but once it does pop the bubble is apparently obvious to everyone. In our opinion, only those who risk capital and profit betting against a bubble can claim to have correctly identified one.

A casual glance at the chart could leave an impression that history is going to repeat itself and silver prices are about to crash. However in order to not only successfully indentify bubbles but also profit from them, one will need to know the tipping point. This is the point at which the bubble is unsustainable and begins to breakdown.

There are many factors which contribute to the emergence of bubbles and one would need to look at a myriad of factors to determine when a bubble may pop. We will focus on just one in this article, momentum. In finance, momentum is the empirically observed tendency for rising asset prices to continue to rise. We are attempting to gauge when silver may run out of momentum and when this bull market will turn into a bubble and ultimately pop.

Whilst some may consider it crude to study momentum as opposed to fundamentals such as supply and demand, we feel that it is vitally important from both a psychological and technical standpoint. Psychologically if investors are used to silver prices increasing 30% per year and then silver prices only increase at a rate of say 15% for one year, psychologically this return looks poor on a relative basis, even though it is still positive and normally would leave many investors satisfied. Therefore there is a greater incentive to sell silver since it is not performing as well as it was in the past. Technically once a bubble is fully underway prices begin to rise in a parabolic or exponential fashion. If the price ceases to rise in an exponential fashion, selling will commence, even if the price is still rising, since investors will have extrapolated the exponential rise and so anything short of parabolic will not meet their expectations.

The most recent example of this was in the housing bubble. Prices didn’t actually have to fall at all to trigger a crash, all they had to do was plateau or rise sluggishly and this would spark selling by people who had bet on prices continuing to rise. Without continually rising prices real estate investors could not refinance and borrow more against their properties to buy additional properties or other assets, so the buying stopped and the selling began. This was when the bubble popped; this was the tipping point before the actual crash that many investors strive to identify.

So how does this relate to silver? Although we believe that silver does indeed have strong fundamentals, we do think it is likely that the metal will become drastically overvalued in the future as a result of speculative buying by the masses. In an attempt to measure the momentum behind silver and when this momentum will run out, we have analyzed the rate of silver prices increases over the last 50 years or so, since 1968.

The chart below shows the rolling 100 day percentage change in the silver price. This is not a perfect measure of momentum, but it’s a start.

As you can see, during the blow off in 1980, silver prices were increasing at a rate of roughly 400% per 100 trading days. This compares with a current rate of increase of approximately 73% per 100 trading days. So if you think silver’s current rally is going at a nose bleed pace, in the 1980 blow of silver prices were increasing 5.47 times faster than they are at the moment.

So far it appears that the rate of increase in silver prices at present is still below the relative rate of increase in 1980, therefore implying there is further upside. However this analysis doesn’t take into account that the Bunker-Hunt brothers were attempting to corner the market for physical silver in the late 70s, a buying force which is not present today. Therefore one should err on the side of caution when using this barometer for trading purposes as it may not reach 1980 levels. But at present the barometer isn’t even close, so we do not think silver is in bubble at the moment.

The chart below best shows how silver is far from in a bubble yet. We have smoothed the 100 day percentage change and overlaid the nominal silver price.

As shown by the blue line still being relatively low in contrast with 1980, there is still a great deal of upside potential for not only the silver price itself, but the rate at which silver prices are increasing. When both the blue and red lines are parabolic, then a bubble argument can be made.

As always the most important part of any discussion of the financial markets is how one should deploy capital. Whilst a silver bubble is not yet upon us, we are going to suggest some trading strategies that could offer attractive risk-reward dynamics should a bubble scenario unfold.

Many people would be inclined to take a short position if they believed silver was drastically overvalued and in a bubble. However in our opinion this is not a particularly attractive trade. Whilst of course the investor will make money if silver prices fall, the investor is also open to unlimited liability on the upside and should silver prices continue to rise substantial losses could be incurred. Taking an outright short position via futures or short selling silver stocks implies that one believes that one’s timing is spot on. In reality nobody can ever have perfect timing so it makes sense to allow for some error in your judgement when placing the trade.

This is important when placing any trade, but it is particularly crucial where bubbles are concerned since the market is moving in extreme ways. In the 1980 blow off silver was increasing at a rate of over 100% per 30 days, anyone who was short would have got wiped out, just for being 30 days too early.

However by utilizing options the trader can take a position that will benefit from an imploding silver bubble but offers much better risk-reward dynamics than being outright short. There are two basic trades that we think would be attractive under such a scenario.

The first is allocating small amounts of capital to near term ‘out of the money’ puts. By purchasing puts that are say three months or less from expiration and at least 25% out of the money the investor is effectively buying insurance against a crash in silver prices. If silver prices plummet then the value of the puts will explode, but if prices keep soaring the downside is strictly limited to the premium paid for the put. If this trade is placed prematurely, it can be placed again in another few months, and again and again so long as the trader holds the view that silver prices are going to crash. If the view is correct then the eventual payoff will more than cover the cost of being too early in buying the initial puts.

The second trade is a longer term trade that involves selling at the money call vertical spreads which are more than a year from expiration. This expresses the view that prices are not sustainable in the longer term and therefore by the time the call options expire they will likely be worthless due the fall in silver prices. Additionally, if prices were spiking higher it is likely that call options would be being bought heavily by speculators, thereby inflating their premiums. By selling these call spreads one would benefit from a fall in silver prices and a reduction in call buying/increase in call selling by speculators over a longer term time period, without taking on unlimited risk.

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Commerzbank downgrades sugar as supply fears ease

by Agrimoney.com

Commerzbank cut its forecast for sugar prices, citing the prospects of easier sugar supplies, heightened by an estimate that Russian output of the sweetener may rebound 40% to a record high this year.

The bank cut its forecast for sugar prices in the April-to-June quarter by 2 cents to 25 cents a pound, an estimate which, while in line with current values, suggests further weakness to come.

"This is a quarter average and we had higher prices earlier on," with New York's near-term May lot starting the month above 27 cents a pound, Commerzbank analyst Carsten Fritsch told Agrimoney.com.

"There is a risk that prices will decline further," echoing last year, when a price correction continued from February into May.

However, the bank urged some caution too, noting that in 2010, when prices dipped to 13 cents a pound, "a substantial market surplus was also expected", only to evaporate amid a series of weather setbacks.

'Significant easing'

The price downgrade reflected "increasing reports of a significant easing" in world sugar supplies, with India considering permission for further exports, after the release of 500,000 tonnes last month, once final production figures are known.

Meanwhile, Thailand, the second-ranked exporter, is placed for a 40% rise to 6.7m tonnes in shipments, after an increase to 9.5m tonnes in output, according to official data.

And Lanworth, the US consultancy, on Tuesday lifted by 11m tones to 585m tonnes its forecast for this year's cane harvest in Brazil, the top sugar producer and importer, citing increased soil moisture.

Brazil's sugar output looks on course to hit 37.8m-42.4m tonnes in the newly-begun harvest, up from 37.6m-38.6m tonnes last year, Lanworth said.

Russian recovery

Furthermore, a report late on Tuesday from US Department of Agriculture attaches in Moscow forecast a 40% jump to 30m tonnes in Russia's sugar output, based on a forecast of plantings reaching an all-time high of 1.2, hectares, and a better year for yields after last year's worst drought on record.

"Russian sugar beet production is expected to rebound strongly in 2011 and effectively displace a significant portion of raw sugar imports," the attaches said in a report.

Russia's imports, which have been encouraged by a temporary cut to $50 a tonne from $140 a tonne in duties until the end of this month, will fall by one-third to 2.0m tonnes, the lowest since at least Soviet times.

The report also highlighted industry expectations that investment in Russia's sugar plants will grow from 14bn roubles ($460m) last year to 15.8bn roubles ($526m) in 2012, helped by government subsidies.

"Almost half of the sugar processing plants in Russia were built before 1917, and none have been built in the last 25 years," the briefing said.

"Sixty percent of processing equipment is worn out."

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