2-21-2008
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Stagflation...
Like it or not, our economy continues to slow down while inflation, in practically every tracked category is on the rise. The Fed notes released yesterday point out that the Fed is very aware of what is going on and in reading their notes, I think it clear that they are no longer, "behind the curve".
The Fed realizes that there are substantial downside risks to our economy. Their primary tool to remedy this is the lowering of interest rates, which has a very nasty downside. Inflation!
What many find bothersome is that after all the rate cuts and the passing of the Stimulus Package; credit is still difficult to obtain, even for those deemed creditworthy. This needs to change. Once it does, part of the interest rate cuts we've seen or that will be soon made, will have to come "off the table", resulting in interest rates increasing. However, let's not get ahead of ourselves. At this point of the cycle we're in, lower interest rates are expected. The markets have prices in another 50-basis point cut by the summer.
Inflation....
For those living underground, take notice. Inflation has taken hold of hard commodities. We are in a major Worldwide Commodity Bull Market, currently spurred on by rising energy prices. True Bull Markets pass leadership roles from complex to complex. Think about this. Grains just rallied to all time highs while Crude Oil was in the process of setting back from $100 a barrel, down to nearly $85 a barrel. Energy prices just ran up again, setting all-time record highs. T. Boone Pickens was on CNBC today and said he expects a 10 to 15% pullback in prices into the next quarter. After that, higher prices. My guess is that as refineries convert over to gasoline for heating oil production, oil demand will fall off. Once summer driving demand picks up, demand for Crude Oil will pick up and new highs should be in the cards.
Grains after setting record highs have begun consolidating their gains. My point here is that in Bull Markets, it's not uncommon to see rotation...on a regular basis.
While all this is going on the US Dollar is acting like it has bottomed out. I am not sure that there is a lot of upside to the Dollar at this time, given my belief that more interest rate cuts are in the cards. However, I do believe that a falling or stagnant Dollar has a silver lining. It makes our goods and services cheap for export, which makes buying from and investing in the US appealing, as long as our economy holds together.
At the next OPEC Meeting I expect to see a proposal floated to once again price Crude Oil in Euro's. The impact of this is not small if it were to pass, as the need to own Dollars to pay for oil would diminish. How discussions go on this will be important, as a falling Dollar will be yet another bullish catalyst for higher commodity prices.
Seasonal Gold Trend...
Look at the Seasonal Chart of Gold, which covers the last 15 and 34-years respectively. It was provided to us by the Moore Research Center, Inc.
June Gold
Given the contra-seasonal move taking place now, I expect price later this year to be much higher the seasonal trends kick in. I have to admit that I am a bit suspect of prices continually rallying right now, since that would imply a move that goes straight up. Given the pullback in Crude Oil today, the overbought status of gold and the contra-seasonal move at hand, you need to be very careful in taking on new positions at current price levels and need to make some key decisions on how to trade this market.
The simple fact is that I feel you have to become involved, but in a very cautious way. Let's look at a chart of June Gold.
Since December 17, 2007 prices have rallied, basically non-stop to $963. A $150 move. It would not surprise me to soon see $1000 an ounce. However, just as in Crude Oil, "Event Numbers" like $1000 often stop price onslaughts for a while. It's just how things often work.
Support in June Gold is back at the 18-Day Moving Average of Closes, currently 923.9. It is in this price zone that I think long positions should be considered.
Look at the current Stochastic reading. It is overbought with a 77.4 reading. Anything over 70 is considered by me to be overbought. Should the "K" and "D" readings get over 80, an embedded Stochastic reading would develop. That would be very bullish. However right now, prices are overbought, which means you have to be cautious.
I receive a lot of questions on how I use Stochastics in my price analysis. I teach how I use them in my trading course called The Futures Academy. I've created a short video that explains my teaching style. In the video I speak about The Futures Academy and the indicators I use in my trade analysis. You can click on the image below if you are online or simply type the link address below the video image into your web browser.
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I think it prudent that you tip-toe into a Call Option Spread, using a time frame that carries past the Seasonal Trend, which often sees lower prices in March. Given that contract highs now being made, I find it doubtful that the Seasonal Down Trend through March will work this year. It's after this time frame kicks in, up ticking in momentum as history shows, that gold prices can soar.
Upon us is a "Perfect Inflation Storm". I wrote about it months ago. Now it's become reality. Corrections, hard ones are likely to occur. If you decide to use futures to get long, you should consider a simultaneous Put Option as insurance.
My recommendation will be in Call Option Spreads. They tend to slow the game down in terms of volatility, offer time and if right...reward. Did I mention that there is a fixed risk to them? You can't lose more than you pay, including commissions and fees. Most importantly you can get out of them at practically anytime prior to expiration.
My idea is to buy the June Gold 930-960 Call Spread at $12.00. I recommend putting on only 33-50% of your normal position size, using hoped for price breaks to add to this position going forward. The spread closed today at 14.10.
Let's spend a moment or two looking at a Daily Chart of May Silver.
I look for silver prices to continue up into the February-March time frame. The amount silver can rally can be breathtaking should the economy believe it can get on better footing. Given my stance on inflation and the Fed's speech today, I am very bullish on silver and look for it too closely follow past history.
Let's look at a Daily Chart of March Silver.
The very first thing I notice is that May Silver in a Bull Trend and is overbought. At this juncture, either the Stochastic Study embeds or prices most likely will correct. I don't want a position in play to find out which way it goes. Rather, I'll sit back and wait for a correction to jump on.
My Thoughts on Silver
Let's assume the Fed's got it right and their entire rate cut package along with the just passed Stimulus Package works. The US economy holds on and things begin to improve. As this occurs, demand for US goods both at home and abroad will increase.
Now let's assume the Fed has it all wrong. We go into Stagflation. This doesn't stop China from needing silver and copper to grow their industries, maybe at a slower rate, but they will still grow them. It seems a no lose bet that silver over the longer term will go up as long as economies outside of the US continue to grow as I think they will. The only question in my mind is the pace of that growth.
Copper, the poor man's metal is racing upwards, towards $4.00 a pound. Silver, a rarer metal, seems underpriced to me.
Sure there will be price corrections. At these levels, sizable ones when they occur, which should be any day now.
My point here is that silver doesn't get the attention gold does because the Hunt Brothers once drove prices up to $50 an ounce. Therefore, prices getting back up to $18.00, a third of its all time high is for many, simply not headline news.
I want in. It's really that simple. The price of entry and how to get involved remain the issues.
I will use Call Spreads, once prices correct. If not correction, I will come up with another game plan. Everything right now is tied to the price of energy and what other hard commodities like grains do.
Experience tells me that we're seeing a bit of a "feeding frenzy". Funds are probably buying up hard assets like there is no tomorrow. This often sets the stage for downside corrections.
Be patient and keep up with my twice daily reports for order entry points.
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