6-5-2008
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The Metal Markets
I find it rather fascinating to listen to market commentators try to create a "Dollar" event, that simply isn't occurring. If you listen to CNBC as I do, I would like to know how gains or losses of 30 points in the Dollar are breakouts. They aren't.
As I stated in last week's letter, the Dollar is caught between 74.50 and 71.05. The bias is to the upside both on the charts and fundamentally speaking.
Inflation is a large issue both here and abroad is now taking center stage with Central Bankers around the globe. To me this means higher interest rates will be forthcoming. The value of the Dollar will be in part determined by the course of the Federal Reserve in coming weeks. The ECB came out today with very hawkish comments, meaning it is very likely that the next move out the ECB will likely be a rate increase unless inflation pressure subsides.
In order for the Dollar to mount a sustainable rally, the prospect of higher interest rates in the US has to take center stage, which is in line with what Chairman Bernanke spoke about earlier this week. The Fed is still dealing with issues caused by the Subprime mess which has created a credit crisis.
Should Moody's lower the ratings of two bond insurers, the Dollar will most likely come under pressure.
CFTC Pressure
The CFTC (the Commodity Futures Trading Commission) is looking into the role of index funds, how large they trade and their impact on the markets they trade in. This has caused heavy liquidation in a number of markets, including energies and metals since the goal of the probe seems to be to see if index funds artificially caused a rise in those commodity markets.
Should the CFTC determine that position limits or margins need to be altered for index funds, some market analysts believe such a move would stop prices from moving higher. I do not agree with that analysis. Rather, I believe the system in place is working just fine. Tweaks to more add more transparency on what the funds are doing might be welcome, but causing index funds to hamper what they trade will in my opinion simply give them reason to move their operations overseas, away from CFTC control, where they will find another way to do whatever they do. There is precedent for this as we've seen this happen before.
My point here is that I do not believe that index funds are "the" cause of the run up in energy and other commodity market prices. Rather, I believe Supply and Demand to be the cause. Tampering with what index funds can and cannot do in terms of "size" is in my opinion not the answer since what they do creates liquidity and opportunities for hedgers, which in large part is what the futures markets were created for in the first place.
Oil, the Dollar and Metals
The liquidation caused by the CFTC probe is in my opinion the main reason for the break in Crude Oil and it's by products. Demand for energy remains robust. Weather patterns are now becoming a concern. The consumer is still spending but is showing that he can be flexible and cut back on driving and on what he drives.
Without doubt, the price break in energy added to the weakness in gold and silver. However, from a historical perspective, both normally break at this time of year, so the catalyst for the break is not as important to me as is what the seasonality of the market is. It is down as shown on the Seasonal Gold chart displayed below, provided to us by the Moore Research Center...http://www.mrci.com/
The Seasonal Chart below shows what Gold has done over both a 15 and 34-year time span in term of price momentum. I use the comparison to view and compare longer-term historical data versus shorter-term, more recent data.
Gold is not rallying yet. It often does so at the beginning of June and rallies through mid month, only to fall back into early July where it often bottoms out and rallies into year end. The key here is that I think we are coming to the end of the break in Gold and will soon be buying either futures or Gold Call Options.
August Gold
Let's look at a Daily Chart of August Gold.
Here's what I wrote last week: "The issue now is one of a lack of fundamental support for gold with the Bears in control for the near term. I expect rallies back up to the 18-Day Moving Average of Closes, near 897.5 to be short sale opportunities with the Bollinger Band Bottom to be the initial downside target."
As you can see on the above chart, the rally went to the 18-Day Moving Average of Closes, the "red" line and has fallen back. My expectation was for prices to fall back to the Bollinger Band, but I am now concerned that is a bit too aggressive a wish. If you are short, I would cover right now. Here's why.
Stochastics are oversold with a reading of 22.01. Crude Oil has toppled and is now beginning to act as though it has gotten oversold. Silver acts like it has bottomed against the 16.50 level and the US Dollar came under selling pressure today when the ECB made it known that instead of a break in interest rates, they may increase them to fight inflation, taking away the interest rate differential play that many had hoped for to prop up the Dollar. Even if the Fed were to raise interest rates, if the ECB does so the Dollar at best is at status quo.
Last week I was hoping the market would rally and fall back to the $860 level. It rallied right up to the projected resistance point and broke hard, falling within $7 of my downside target. That is close enough for me. Cover your short positions now if you followed my trade idea.
I am not yet bullish. Rather outside influences and the oversold condition of Gold make it prudent to cover short positions.
Rallies back up to the 18-Day Moving Average of Closes, currently at 898.9 should prove difficult to hold. My thought is that the market needs more time to go by to get past the June time frame, where prices are often weak.
Today's $5 rally in Crude Oil and the rally in its by-products should add support to the Metal Markets late today and tomorrow.
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Silver is acting stronger than Gold. However, like Gold, Silver often breaks into late June. Look below at the Seasonal Tendency of Silver.
Historically speaking according to the Seasonal Silver Chart, Silver prices often peak at the middle of May and break down until the end of June. A retest of lows often occurs at the end of August and prices risk into the end of the year.
July Silver
Silver followed Gold and the Energy Markets down last week. However, unlike Gold, today Silver made a stand against the multi-tested zone of $16.46, shown as a light blue thick on the chart below.
Unlike Gold, Silver until today did not get back up to the 18-Day Moving Average of Closes. Rather, it went sideways from $17.00 down to $16.46 and broke out of that trading range today to the upside, where prices stalled against the 18-Day Moving Average of Closes, shown on this chart at $17.198.
Silver is no longer oversold. It has been since my report last week and only today did it begin to correct this condition.
The trend in Silver is at this point in time, "neutral". I say this because of the chart pattern. Today's rally caused a "higher-high" to be made. By this I mean that the last high at 16.95 was taken out today. An Uptrend is comprised of Higher-Highs and Higher Lows. Today began the Higher-High part of the Uptrend definition. It remains to be seen how a break low is handed.
As you can see prices are still under the 18-Day Moving Average of Closes. Yes prices rallied up to this number, but that's about all it has done so far. I do not see Silver as being a buy just yet but one cannot be Bearish as long as the chart pattern is one of Higher-Highs. I am simply neutral at this point in time and prefer to see how Silver handles its seasonal tendency, which is to stay weak in June.
I think by year end Silver prices will be sharply higher. The question is one of getting long as best we can.
Should prices drop and close under 16.46, a "Head and Shoulder" chart formation will have occurred, which would be very bearish for Silver prices. Given the seasonal weakness Silver often displays in June, I am sitting on the sidelines until I see more proof that Silver has a base from which to work higher.
I see no reason to go short given the current chart formation of Higher-Highs, but would consider doing so if prices got back under today's low of $16.505.
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