Gold and Silver Bull Market 'Topped'?

By: Julian_DW_Phillips

With the silver price riveted to the gold price, what happens to gold, applies to silver.

Many believe we are at the point where the rising gold market has entered a 'bubble' and is losing momentum just ahead of the 'bear' phase. With record prices of $1,610 and €1,136 seen in the midst of debt crises on both sides of the Atlantic, things surely must get better and gold and silver prices must fall...

After all, all markets go through bull and bear phases. What goes up must come down.

It is this implication that is lodged deep in investor's minds, particularly in the developed world. It seems to be the case going right back to the 1800's when what we know as 'markets' in the financial world really developed. Most markets have gone through these two phases more than once. Why are they given these titles? A 'bull' market is called such because when a bull attacks he throws his head upwards catching his victim on his horns and tossing it. It's called a 'bear' market because when a bear attacks he claws his victim in a downward thrust. We look at whether the gold market is open to these phases to find the answer to our question.

Money or Commodity

If gold is a commodity then it rises and falls as a result of the ebb-and-flow of the economies that use it. If so, it will move in synch with the financial markets cycles and remain subject to their dominance. But when it comes to gold and silver, nothing is that simple!

If the bulk of the demand for a commodity is contracted to buyers, then the only influence these contracts have on the price of the commodity is through the referencing of that supply to the market price. The supply of the metal in the open market outside of contracted amounts is the quantity of that metal that determines the price of the metal. Call it the 'marginal' demand or supply. This supply is sent to the open market for buying by non-contracted buyers. It could be just to top up for unforeseen demand, or it could be to sell overbought amounts. This determines the liquidity of the market. On top of that, speculators frequently enter the market taking a view on demand and supply expectations, taking off supplies to force prices higher or introducing them, to force prices lower. In a pure commodity market, these views are based on industrial demand/supply expectations.

But gold is not so simple or predictable. Most buyers of gold do not buy gold for its industrial use. Where it is used in industry it is done so for hi-tech purposes, which is relatively price-insensitive. So the price of gold has little bearing on the demand from industry.

Gold is used to decorate people in its Western jewelry application. There is little sense of showing off the extent of your wealth when wearing gold in the West. Additions of jewels and artistic presentations add so much to the cost of such jewelry that the price of gold in such jewelry is a minor factor. This type of jewelry demand does fluctuate with the state of an economy, but such demand is a small component of the gold market. In the past it has been an influential one, particularly before the eastern markets 'emerged'. Add to this the determination of the jewelry trade to extend the buying of gold down to poorer people's levels by lowering the purity of the gold sold. This increased the vulnerability of the gold price to the state of the developed world economies. Such demand became the 'swing' factor in the gold price.

This too was at a time when central banks were not only out of the gold markets but encouraging a heavy increase in supply. As a result, analyst's studies placed great emphasis on western jewelry demand.

Then at the turn of the century, the gold market changed its shape. Asian markets 'emerged'. The driving force behind their buying was totally different to western attitudes. They followed the maxim, "One buys gold, not to make money, but because one has money." The gold bought was nearly pure. It was bought because it was treated as money and money of a higher quality than currencies. When used in jewelry, it was a statement of the financial security of the wearer. Nothing could be more different than the Western view of jewelry. Central banks changed their attitudes to holding and selling gold then too.

These structural changes altered the dynamics of the gold markets. Over time, investment demand grew to become by far the greatest source of demand for gold. In addition, central bank-inspired supplies (through their encouragement of increased supplies) stopped and gold producers became a source of demand. This happened for a while as they bought back previously sold gold. Central banks cut back on their supplies to the market until they stopped selling and other central banks began buying.

But more was changing in the gold markets. As the ability of currencies to give an accurate measure of monetary values decayed, gold began to fill the hole they left. This aspect of value grew to the point that the head of the World Bank suggested that gold be used as a reference for value measurement. The concept has taken hold again, but as a banker, Mr. Zoellick has remained silent since then. His silence, while deafening, has reaffirmed gold's inherent value. After all, as Alan Greenspan, the most famous Fed Chairman said, 'Gold is money in extreme times'.

Its monetary value lies in its remarkable quality of being both an asset and liquid cash, globally and in all circumstances. Currencies can't be this. They remain the obligations of one nation or another, dependent entirely on the reputation of the nation printing them. Gold is considered money, without the strings that are attached to national money. Investors from central bankers to Indian or Chinese rural farmers believe that gold is a counter to unbacked currencies issued, at will, by national governments all over the world.

Gold has no nation. It carries nobody's obligations. It's what enemies will accept from each other.

The concept of consuming gold is no longer a part of this gold world. These structural changes cut gold off from being just a commodity.

Gold is not a commodity!

Gold Bear Market in the 80's

When Mr. Volker capped inflation in the 1980's by whipping U.S. interest rates up to the mid 20% area, inflation was stopped dead in its tracks. The U.S. economy was vibrant and capable of handling such a financial wrench. At the same time, after a decade-long battle to stop people in the developed world from believing in gold as the only money, the supply of gold was turned on by central banks.

Limited sales from the States and the I.M.F. were followed by limited sales of gold from European central banks. But the key accelerant to the supply of gold to the market was the rapid acceleration in the supply of gold. This way achieved by the provision of gold loans to mining companies against their future production of gold. Mining companies were then able to sell the borrowed gold forward in the market, delivering up to 5 years ahead and earning, not just the gold price (it started to fall heavily from the $850 peak down to $255 at its lowest point) but the interest due to the seller on forward sales to the final delivery date (i.e. the contango). The bulk of the already discovered and easily mined gold in the world was produced, with central banks being repaid their gold once all these new mining operations could deliver the gold to them from their own production.

The gold markets were swamped with an oversupply of gold while developed world central banks encouraged the perception that they were about to sell their own gold reserves shortly. This bred the perception that there was a 34,000 tonnes gold overhang threatening the gold price. Was that a 'bear' market? Technically, yes - just as the Hunt Brother's attempts to corner the silver market by taking the silver price up to $50 was a 'bull' market. The central bank's campaign to swamp the gold market with new supplies of gold over the fifteen to twenty years that the gold price fell to less than a third of its price proved successful.

But it was not a 'bear' market in the way we normally understand it! It was manipulation, pure and simple.

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How To Buy Stocks During Corporate Earnings Season

By: David_Grandey

IT’S EARNINGS SEASON
True to form with thrills (IBM, AAPL, VMW) and spills (RVBD, FTNT) earnings season is here in all its glory. So how do you go about buying a stock in the volatile climate? Let’s take a look at a couple of examples from the watch list in our newsletter — starting with an example of what not to buy, then an example of what we did buy and a stock that is setting up to be another good buy should conditions hold up.

What not to buy:

Here we have FTNT that was setting up nicely before earnings. It was pulling back off of its highs in an orderly manner and was above support and the 50-day. What we wanted to see after earnings was the stock finding support at the 50-day or the blue or green lines. If that occurred, we would have stepped up to the plate to buy it. However, as you can see, the stock crashed through multiple areas of support and therefore is no longer a buy candidate.

Now let’s take a look at what to buy:

Yesterday TSCO announced earnings and the stock went from 70.67 to the 65-66 range.

Why are we buying it on weakness? Because its uptrend is still intact as defined by the upward slopping green trendline. That’s what we wanted to see happen with FTNT.

Now let’s take a look at a stock that is setting up nicely:

We want to see NFLX tag the 50-day after earnings. If so, we’ll initiate a long side trade.
“Let your stocks tell you what to do by the action they exhibit”
“We trade what we see, not think, hear or fear”

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Crude Oil Outlook Remains Strong, 2011 Halftime Report

By: Frank_Holmes

This year has been eventful for the oil patch. Natural disasters, revolutions, terrorist attacks and political maneuvering kept oil bouncing around $100 per barrel and 3.8 percent higher on the year at the end of June. Despite the volatility and large number of external forces affecting oil prices, the International Energy Agency (IEA) said in its most recent Oil Market Report that “the bull run evident since autumn 2010 therefore looks in large part to be justified by supply and demand fundamentals.”

Oil industry analyst PIRA estimates incremental demand will outpace supply by 1.1 million barrels per day on a year-over-year basis during the third quarter of 2011. The U.S. Energy Information Administration (EIA) says long-term supply/demand drivers indicate the market will remain tight for the foreseeable future as growing demand from emerging economies for liquid fuels and slowing non-OPEC supply growth “maintain upward pressure on oil prices.” The IEA forecasts oil prices to average $98 per barrel this year and $103 per barrel in 2012.

Oil Demand
The IEA forecasts the world will use 91 million barrels of oil per day in 2012, an increase of 1.5 million barrels per day. The IEA also revised its 2011 oil demand projections upward by 0.2 million barrels per day. Projecting outward to 2016, the IEA’s baseline scenario assumes a healthy 4.5 percent global GDP growth and an average oil price of $103 per barrel. With these assumptions, annual oil demand growth should average 1.2 millions barrels per day through 2016.

Emerging markets are almost entirely the source of this increased demand, with China accounting for 41 percent of demand growth over that time period, the IEA forecast says. The chart illustrates how developing (non-OECD) country oil demand has dramatically increased since the mid-1990s while developed world (OECD) demand has decreased. Through two financial bubbles and a global financial crisis, non-OECD demand has stair-stepped its way to nearly doubling in less than 20 years.

How is this possible? Many non-OECD markets have favorable demographics, rapidly urbanizing populations and industrializing economies that have returned many developing economies’ GDP growth rates to pre-crisis levels.

Rising incomes have also outpaced rising oil prices and sustained emerging market demand despite a general reduction in subsidies, the IEA says. Rising wealth has also established a new global middle class that the World Bank estimates will be more than 1 billion strong by 2030. In fact, the World Bank was cited in a National Geographic article earlier this year forecasting that for the first time ever, more people in the world will be classified as middle class than poor in 2022. Today, roughly 70 percent of the world’s population is classified as poor.

Major emerging market countries, such as China, India and Saudi Arabia, have reached the important GDP per capita range ($3,000-$20,000) where oil demand historically “takes-off.”

China carries the biggest stick among emerging markets when it comes to oil demand. Strict tightening measures from Beijing and rising inflation slowed the country’s oil demand growth to its lowest level since 2009 in June. However, China’s oil demand is still expected to grow 7 percent this year, which is inline with the country’s five-year average demand growth rate, according to Deutsche Bank. The summer months have historically been weak periods for oil demand in China but Deutsche Bank estimates growth rates will recover during the fourth quarter.

Chinese auto sales growth has slowed but still registered 10.9 percent year-over-year growth in June. In an interview with Maria Bartiromo for USA Today, Ford CEO Alan Mulally called China’s car market a “very exciting development.” The company is projecting China’s auto sales will reach 32 million by 2020—28 percent of the entire global market. Ford isn’t the only U.S. auto manufacturer tapping into China’s booming auto market; General Motors’ Buick brand is one of the most popular in the country. According to the Brookings Institute, General Motors sold 10 cars in the U.S. for every one car sold in China in 2004. Today, that figure is nearly 1-to-1.

In the developed world, the outlook for oil demand is less bullish. OPEC says the “austerity measures, combined with high levels of both debt and unemployment, are likely to dent the fragile recovery in major OECD countries.”

While demand growth in OECD countries is underwhelming, consumption rates have recovered from recession lows at a much faster rate than many expected. You can see that OECD demand contributed heavily to the recovery in global oil demand from early 2009 to late 2010. In fact, the developed world contributes little to global oil demand growth but still consumes more than half of the world’s total demand.

Despite China’s rise, OPEC says the fate of the U.S. economy is the most influencing factor for oil over the next 12 months. Oil demand in the U.S. was revised upward in May and the U.S. economy is forecasted to see 2.5 percent GDP growth in 2011.

PIRA says the U.S. economy is signaling strength in the second half of the year. It cites business capital expenditures as improving, which generally leads to employment gains and increased household consumption. It also expects a 20 percent hike in auto manufacturing output from the second quarter and an increase in consumer spending.

A big determinant of U.S. demand and consumer spending is gasoline prices, which the EIA forecasts to average $3.56 a gallon in 2011—up from $2.78 in 2010. U.S. consumers have already shown to be sensitive to higher prices with total motor gasoline consumption down more than 2 percent on a year-over-year basis during the second quarter. While OPEC expects U.S. gasoline consumption to return to normal rates, OPEC calls it oil’s “wild card” for 2012. Gasoline consumption could be negatively impacted by economic turbulence, such as a dip in employment.

Oil Supply

Oil production was rocked by several unexpected outages during the first half of 2011. The revolution in Libya, political divisions in Iraq, terrorist pipeline attacks in Nigeria, accelerating drug violence in Mexico and instability in Yemen have all negatively impacted oil production. PIRA puts the total loss of non-OPEC production at 74 million barrels. This is more than the entire amount of production losses in 2010.

Supply in the second half could also be affected by various factors such as hurricanes, maintenance issues and decline rates. The EIA is projecting non-OPEC crude production to increase by 540,000 barrels per day in 2011 and 740,000 barrels per day in 2012.

The IEA sees global production increasing by a little more than 1 million barrels per day annually until 2016. This is a result of increased capital expenditure, which has positively impacted existing assets and accelerated new projects, the IEA says. High oil prices are generating new supply, but non-OPEC growth is coming from higher cost areas, such as tar sands. Countries such as Colombia, China, Canada and the U.S. are expected to see the biggest gains.

OPEC production is expected to decline by roughly 300,000 barrels a day in 2011 and the EIA projects OPEC spare capacity to fall by 12.5 percent this year from 2010 and then another 11 percent in 2012.

It’s A Different Kind of Bull Market
 

If you’ve been around a while like me, you can remember the oil shocks of the 1970s. Oil prices skyrocketed and Americans waited in mile-long lines just to fill up their cars with gas. Today’s prices might conjure up some of those memories but we’re living in a different kind of bull market today. BCA Research says there are a few key reasons today’s bull market for oil is much different than the embargo-driven bull run from 1973-1980.

• Non-OPEC supply jumped from 27 to 41 million barrels per day in response to the embargo. Today, non-OPEC countries don’t have the ability to ramp up production like that. Even if they did, BCA says it wouldn’t be enough to keep pace with rising demand from developing countries.
• OECD countries drove global oil consumption in the 1980s, accounting for 70 percent of total demand. Today, that figure has dropped to 50 percent as the demand growth has shifted to emerging markets. Developing countries are less susceptible to higher prices because of subsidies, making similar demand destruction unlikely, BCA says.
• Global spare capacity has vanished so much that almost any oil-producing country, not just top producers such as Saudi Arabia and Russia, can cause a price spike by withholding access to its resources, BCA says.

Today’s oil market is much different than what we experienced back in the 1970s. Back then, countries such as China, India and Russia had no global footprint; they were isolationists. Russia was tucked away behind the Iron Curtain. Today these countries are building their economies and squeezing the existing supply of the world’s resources, including oil.

These factors indicate that growth in global oil demand will likely outpace increases in production capacity and create a “tighter market” than what the IEA expected back in 2010. As the IEA sums it up, “[the] market will ultimately adjust to higher prices, albeit supply and demand remain unresponsive in the short term. Indeed, oil’s price inelasticity underpins the recent extended upward price shift in the face of resilient non-OECD demand growth and perennial supply-side risks.”

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Gold and Silver Psychological Barrier Reached, Where Precious Metals Sector Headed Next?

By: Przemyslaw_Radomski

Being technical analysts is one of our professions, so it is quite rarely when we feel any emotions regarding the market regardless if we’re making substantial gains or if we’re on the losing side. But, off the record, we will admit to a slight twinge of a thrill when gold broke the psychological barrier of $1,600 an ounce this Monday.

Putting aside the discussion on whether a breakout is likely to happen or not, it’s a great feeling having a front-row seat to the greatest investment show in town. And the best part is that it’s still Off Broadway and the crowds haven’t yet discovered it, so there is still time to get good seats.

How many of you remember the feeling when gold broke above $400 in December of 2003? Perhaps not all of you were in the gold trade at that time. So, let’s jump forward to March 13th, 2008 when the benchmark gold contract traded over $1,000 for the first time in the U.S. futures market. The $1,000 mark—that was a big one!

We remember other landmarks on gold’s upward journey. On December 1, 2009 - Gold climbs above $1,200 an ounce for the first time as the dollar dropped. On September 27 of that year, spot gold prices vaulted to the $1,300 an ounce mark. Just two months later, on November 8, gold prices broke through the $1,400 an ounce mark as haven buying prompted by renewed budget problems in Ireland more than offset a sharp dollar bounce. It wasn’t so long ago that gold shot up above $1,500 an ounce on April 20th of this year as worries over the health of the global economy boosted the metal as a safe haven. And that brings us back to that lovely round number, $1600, achieved this week.

With the psychological barrier touched, it seems that this week the most important part of the analysis will come from the precious metals themselves. So, let’s take a look at the yellow metal (charts courtesy by http://stockcharts.com).

In this week’s very-long-term chart for gold, we barely see any changes. Gold has moved right to the resistance level created by extrapolating previous tops and bottoms. As we stated in our previous essay on the gold correction:

In very long-term chart for gold, we see a third attempt to move above the long-term rising trend channel. In late 2010, a similar attempt was unsuccessful and was followed by a significant decline. Certainly this could be the case this time as well. Naturally, we could see a true breakout, however so far it has not been confirmed yet, so we remain skeptical.

The current momentum, which gold has shown at the first sight seems to make the breakout theory quite probable (rallying on strong volume is bullish phenomenon), however, even gold is to rally strongly from here, a correction will likely be seen before additional significant upward movement starts. Please note that there is a strong resistance level created by extrapolating previous tops and bottoms and using the Phi #1.618. This is just above $1,600.

If gold can move above this level and confirm its move, the next target would be well above current prices. This would be quite a rally from here, but such a move does not seem very likely over the next few months – at least not yet.

This week we did see prices reverse slightly and they are now consolidating. No breakout has yet been seen and our previous comments remain up-to-date. The situation continues to be quite similar to what we saw late last year (triple top) and it is clear that the consolidation at that time was quickly followed by a decline.

There was not breakout in gold stocks either.

In this week’s HUI Index chart, little has changed and the chart is basically the same as what we presented to you last week. We continue to see a sell signal from the RSI level and the index level is at a noteworthy resistance line. No significant decline has been seen yet but it does appear to be quite likely in the near future.

In this week’s short-term GDX ETF (another proxy for the mining stocks) chart, we see more of the same, although the situation is a bit more bullish here. A recent consolidation resulted in a bit higher mining stocks’ prices than it was the case with the underlying metals.

Thursday’s decline was less significant here than were the declines for gold. The volume action seen was not too bullish however. The price decline on Thursday was accompanied by higher volume than was seen in Wednesday’s rally. It is possible that the sign of strength seen here is at least partly attributable to the recent rally in the general stock market.

Summing up, the situation for the precious metals market appears very bullish at the first sight, but taking a second look reveals that the true breakout remains to be seen.

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PMO BUY SIGNAL

By Decision Point

In our ETF Tracker Daily Report, which tracks over 90 index and sector ETFs, there is a section that tracks the status of PMO buy and sell signals for these securities. This section is sorted by signal, with the newest signals listed at the top. These are mechanical signals, but you have to look at the chart to determine if action is appropriate.

Below is an extract of Thursday’s Report. On the day of a new signal the “Calendar Days Elapsed” is always shown as zero (0), and the “Today P/L” column shows the profit or loss of the previous signal just closed. On the live report you can just click on the line to generate a chart.

The financial sector is an important one, so let’s take a closer look at that chart.

First note that there was PMO buy signal in June. The good thing was that it was generated with the PMO at oversold levels, but the bad thing was that the 50-EMA was below the 200-EMA, meaning that XLF is in a bear market. Under those circumstances it is prudent to wait for a second price bounce before acting.

As is common, the second bounce did materialize with a rally off a lower price low in July. This was accompanied by a higher PMO bottom, which produced a positive divergence. This setup looks promising, but there are no guarantees. Mechanical PMO signals are information flags that are intended to attract our attention, but discretion should be used in any action taken, and stops should be used for managing/exiting positions, not the next PMO signal.

As part of my analysis I like to check the long-term technical picture. While XLF is about 200% higher than its 2009 lows, it is well off its 2007 highs, and it has been moving sideways for two years. It may have found support, but there is resistance at about 17.00.

Bottom Line: A new PMO buy signal on XLF draws our attention to what looks like a good setup for a short-term trade — double bottom, positive divergence, and expanding volume. The long-term chart does not hold much promise.

This is not a recommendation to buy or sell this security, but an example of how to use charts to clarify mechanical signals.

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TACTICALLY ALLOCATING TO CASH

By Charles Rotblut

“Is it time for you to move to cash” was a headline I saw on Reuters.com on Wednesday. Just two days earlier, I had spoken to a member who was considering putting part of his portfolio into a money market fund.

This was likely just a coincidence, but both occurred as the U.S. debt ceiling debate remains unresolved (something that may or may not change by the time you read this) and Europe is dealing with its own problems. Plus, the economy is moving along at a sluggish pace.

Yet, despite the Reuters’ headline implication that investors are moving to cash, the data suggests otherwise. Retail money market funds held $919 billion in assets as of July 13, according to the Investment Company Institute (ICI). This is down from $947 billion at the start of the year. Institutional money market funds also hold fewer assets now than they did at the start of the year.

This is not to say that there aren’t some investors who have shifted to cash. Cash allocations were at 21.5% in our June Asset Allocation Survey, the highest levels since August 2010. I have also heard from some AAII members who have decided to increase their cash allocations. But there has not been a run to cash. In fact, cash allocations remain below their historical average, according to our survey.

Cash does have an allure when times are uncertain because its reported value is not impacted by the fluctuations of the market. Your purchasing power (what a dollar can buy) will eventually be eroded, and there are risks associated with where cash is stashed, but the account balance of cash isn’t impacted by the market’s ever-changing mood. I should add an asterisk to that last sentence because there have been discussions about letting a money market fund’s reported net asset value float daily. The result would be that a fund’s net asset value could drop below a $1 per share on a given day, the so-called “breaking of the buck.”

The problem with moving to cash when market conditions are considered to be unfavorable is knowing when to get back out of cash. Selling out of stocks during the summer of 2007 and getting back into stocks in March 2009 would have been a great strategy, but few people actually did that. Thus, while you may limit your downside risk, you also risk losing out on potential gains. One of the most common mistakes that investors make is moving into and getting out of cash too late, locking in big losses and missing out on big gains.

Over short periods, an allocation to cash is not a bad thing, especially if it accounts for a small portion of your portfolio. This is particularly the case if you sold a security or fund and are trying to decide where to reinvest the proceeds. Cash also makes sense if you know you are going to have an upcoming withdrawal from your account, such as a required minimum distribution (RMD) from an IRA.

You also need to look at what you have outside of your brokerage accounts. Financial planners recommend that employed individuals have cash savings equal to several months of expenses. Retirees should also have a certain amount of savings to cover unexpected events and emergencies. If there is a large expense that you expect to incur within the next couple of years, such as a new car, you should keep those funds in cash as well. I bring this up because all of your accounts contribute to your net worth, and anyone with a savings account already has an allocation to cash. Thus, you already have some protection against the market’s volatility.

The key to portfolio risk is to find a balance between what allows you to sleep at night and what allows you to achieve your financial goals. If you want to protect your wealth against the eroding effects of inflation, you will need some exposure to stocks. Cash can provide short-term safety, but it won’t protect you against the dual threats of inflation and the risk of outliving your money.

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