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Short dollar trades reverse

Earlier this year when financials puked (Bear Stearns and friends), euro and gold rose to record highs. Although there hasn't been any big institutional failure since Bear Stearns (maybe IndyMac counts), the pukage during the past couple months was arguably more severe (Fannie, Freddie, and friends). But did euro and gold rise to record highs? Hardly. I blame it on two things: moral hazard and dollar jawboning.

The market has accepted the notion that the government will bail out any major financial institution in the name of systemic risk. Of course, such bailouts merely prolong the inevitable, while robbing the tax payers. But for now, the government seems to be able to restore market confidence as they see fit, albeit artificially and fraudulently. It will only be a matter of time before the market acknowledges that the current credit crisis is beyond the reach of government bailouts, and that such bailouts only exacerbate the problem.

Last month, the government embarked on a chorus of dollar jawboning - a concerted effort (Fed, Treasury, and Exec. Branch) never seen before. Although it was a bluff, the dollar jawboning managed to keep the lid on euro and gold as stocks took a nose dive. Bernanke and Paulson must be giving each other HIGH FIVES right now, because just as euro and gold finally started to call their bluff, crude began a long-awaited correction and stocks began a long-awaited bear market rally; their timing couldn't have been any better.



Now the Fed has wiggle room to make even more bluffs. So for now, euro and gold must wait to see better days...most likely towards the end of Q3.

Bounce Bounce Baby

Equities have finally put in a temporary bottom, and it looks like the rally will continue for the medium term. Just as all the macro puzzle pieces seemed to fit together for the next dollar sell-off, the short-dollar puzzle is now falling apart (temporarily), and it will take some time to piece it back together (probably late Q3).

Financials bounce, crude corrects, gold holds steady...

We finally got a bounce in stocks, notably financials. The SEC's attempt to scare (squeeze) bank shorts is just another sign of desperation...by the way, why didn't the SEC include Wachovia or Wamu in their do-not-short list? Meanwhile crude is undergoing a correction (long overdue), which has put some pressure on precious metals, but not as severe as recent correlations suggest. Gold:Crude ratio has actually risen sharply this month, and I think it indicates a significant change in market sentiment in favor of gold.

Gold:Crude ratio YTD


Speaking of gold...what's up with gold stocks? My favorite gold stock, YAMANA, got hammered this past week. Yamana had a spectacular breakout late June, but it has since erased all those gains. Indeed it's pretty frustrating to see mining stocks underperform the physicals so drastically. There are no doubts about the strong fundamentals of Yamana (it's the one stock that I've actually done my homework), so I'll just keep buying the dips. I think Yamana's sell-off last Friday provided such an opportunity, so I bought some Aug 16.0 calls...I figure I'll cover if the lower range is broken, otherwise it should rally to at least 16 before mid-August.

Yamana (AUY) YTD


Update on 7/22/08: Yamana broke 14. Maybe some other time...

Euro: big move within next two days

According to my watch, we're probably going to see a big move in euro within the next couple days...either up or down. There seems to be a lot of euro bears out there, and euro has been lagging behind gold, silver, and yen. Looking at the charts, euro is testing its recent breakout in a symmetrical triangle formation (hopefully a bullish pennant), while eur/jpy also seems to be near a critical juncture. Tomorrow we have NY manufacturing, PPI, and retail sales data coming out at 8:30am, so look for some big moves around that time. Also note that Citi, JPMorgan and Merrill Lynch are coming out with earnings on Thursday. If euro is going to break $1.60, which I hope it does, it's gotta happen this week.

Euro: 2-week (potential bullish pennant)


EUR/JPY: 1-month

Targets for gold and silver by year end

When Bear Stearns fell in March, gold peaked at $1,034 and silver peaked at $21.44. With Fannie and Freddie about to go under, along with a few other institutions in the near future, it is all but certain that the March highs will be taken out. The question is, as gold and silver rally to unchartered territory, what will be the next target before any kind of consolidation? I realize that such attempts turned out to be futile for crude, and precious metals will probably end up shocking everyone as well, but it's fun to guess. So here's my conservative targets for gold and silver by the end of the year...

Gold: $1,100
Silver: $24



Update on 7/22/08: Targets seem more likely early next year.

Treasury promises to buy Fannie and Freddie equity

I talked about the possibility of a reflation attempt in the near future, and we just might see it. Despite the 250bp rate cuts and "innovative" credit facilities by the Fed, we have yet to see a full blown monetization effort by the government. Fannie and Freddie own over $5 trillion of US mortgages, and the government will do anything to maintain market confidence; this is just the beginning of the end. Bear Stearns is nothing compared to the current problem, because the potential systemic risk goes beyond the financial markets; the full faith and credit of the US government is on the line. At times like these, I'm amazed at how schizophrenic the market can be. Just last month, Bernanke was mouthing that downside risk had diminished, and that he was considering rate hikes to support a strong dollar. HA! Indeed this whole situation is very sad, and a lot of people's lives are going to be ruined because of it. But seriously, Wall St and Main St should have seen this coming.

Interpreting EUR/JPY and Equity Divergence

During the past half-decade, eur/jpy has (had) been highly correlated to stocks. This correlation is currently breaking down. So what does a rising eur/jpy mean after a wild consolidation since the subprime crisis went full blown last summer? I think it means that deleveraging is slowing down as investors are finally grasping the direction of various markets and acknowledging that a bear market in stocks has begun. Therefore, the divergence between eur/jpy and stocks will continue, whereas eur/jpy and gold, for example, will start to correlate.

EUR/JPY and SPX: 6-year


EUR/JPY and Gold: 2-year

Yen diamond

Assuming eur/jpy is about to rise to uncharted territory, a breakout by yen from its current diamond formation will mean there will be an explosion in euro beyond $1.6. I'm not entirely sure about the cause and effect of all this, but I'm assuming the imminent eur/jpy breakout is an independent phenomenon, which I will explain in my next post.

Yen futures: 1-month

Gold: potential big upside

1. Retest of breakout from 3-month consolidation seems to be complete.
2. There is a break above the falling wedge formed over past 2 weeks.
3. A bullish engulfing pattern formed today. Shadows are not a consideration.
4. RSI divergence (1hr) strengthening.
5. Euro will soon retest $1.6.
6. Crude seems to have bottomed.
7. Stocks are puking.

Gold: 3-month (retest complete + bullish engulfing)


Gold: 20-day (falling wedge breakout + RSI divergence)

Euro and Yen may have bottomed

I think the dollar is ready for another leg down.

Euro had a big sell off following Trichet's dovish comments, but it was just a flush-out of those who were betting on a hawkish statement; the dollar bears are still holding strong.

Euro: 1-month


Yen is probably the most difficult to trade, and I know this from personal experience (ouch). You just know that the usd/yen is about to go into a secular decline, but it fools you every time. Looking at the yen chart below (futures, so inverse of usd/yen), one can see that the massive rally on 6/26 turned out to fool everyone trading the breakout. I drew the two falling wedge lines on 7/2, and one can see that, while the falling wedge is still in tact, volatility/noise is pretty high. I mentioned in my previous post that we might see a return of reflation, and a clear indication of that would be if yen and stocks rallied at the same time, while carry trades like euro/yen and cad/yen skyrocket.

Yen futures: 1-month

Reflation around the corner?

Many people are expecting a bear market rally in stocks right now, but I think there may be more downside left (i.e. S&P will break below 1200 before there's any kind of rally). Alternatively, I'm also considering the possibility of reflation. Excluding food and energy prices, there's actually deflation in the economy right now, and I'm wondering if some sort of reflation is around the corner. If so, we can see a rally in stocks, commodities (optimal scenario for mining stocks), and FX all at the same time. Of course, the dollar will be sacrificed. I think the best option for central banks right now is to finally open up the monetary spigot.

Whatever the case, it's good to know that gold does well during both inflation (as a hedge) and deflation (as money).

Tough market, but still bullish on gold

There is much to talk about, but I'm strapped for time so I'll keep things short. First, the dollar index broke above its recent downtrend line today, but I think it's a bull trap. Second, crude sold off by almost $8 to $135 today ($135 seems like a pretty good buy to me), yet euro and gold held up pretty well. Indeed, crude has been outperforming euro and gold by a big margin this year (mainly due to increased supply/demand premium and Middle East premium), so it is not surprising to see euro and gold turn a blind eye to crude's puke action today.

I think a lot of traders/trading programs were trying to assault gold today based on the massive crude sell off, but it must have been a frustrating attempt because gold refused to break below key support (910-915). I can't wait to see all the gold shorts that piled in today get squeezed eventually. I have been anticipating an imminent break above 950, but I will be more patient about it. But assuming we are at the cusp of the next bull run in gold, there is one thing that I am almost certain about: gold is not going below 910. If gold does break below 910, I am going to short the hell out of it.

Gold: 1-month (potential falling wedge)


Gold: 6-month (retest of breakout complete?)

Gold: last call

Right now is your last opportunity to buy gold before the next bull run. If you hesitate even for a day or two, you will probably miss the bus. Despite a sharp dollar rally since the ECB meeting (dovish), gold has held up pretty well, and it refuses to drop below $920. I expect gold to break above $950 by next week.

ECB Update

Right now it's about 8:35, and we got the 25bp hike by the ECB, but "Tricky" Trichet seems to be signaling a "one and done" rate hike (dovish). Payrolls came out below forecast, but not as far off as the ADP numbers. Gold and silver were poised for a lift off, but they are not budging. This doesn't look good, and I'm expecting a correction today. If prices do come off, then I'll be looking to buy back at 920-930 for gold 17.75-18.10 for silver.

ECB Vicious Cycle

A prelude to tomorrow's ECB meeting (25bp hike all but certain).

From Macro Man


Indeed, the ECB is fighting a lonely battle. Despite risk to growth stability, I guess they are doing the right thing. As the German finance minister during the 1960's once said:"price stability may not be everything, but without price stability, everything is nothing." A rate hike by the ECB, coupled with weak payrolls, will probably send euro to record highs.

From CitiFX Technicals:

Bank of Korea intervention

Apparently BOK sold about $3b into the market yesterday to prop up the Korean Won. Inflation is out of control in my home country, and it will be interesting to see how far the government will go to support the Won. Maybe the government doesn't really understand economics, but Korea's inflation is a product of printing money to buy dollars so that exporters (Samsung, LG, Hyundai) can benefit from a cheap Won. I remember when the Won was at 900 last year, people were complaining about its negative impact on exports...now that the Won is above 1000, people are complaining about inflation. Frickin make up yo mind foo.

Copper: consolidation complete?

Copper seems to be near the end of a 3-year consolidation. Copper is actually breaking into record highs as I write this post. This should be good for Yamana (AUY), as they own a significant amount of copper deposits (though they are marketed as a gold producer). Despite a weakening global economy, supply/demand is favorable for copper. Mining production remains very low, while the coming infrastructure boom will provide significant demand for copper.

3-year copper spot

Gold: this better not be a fakeout...

There might be a re-test of the breakout...I believe in this bull market!

6-month gold futures

Bite the silver bullet

There's been a succession of breakouts during the past week (crude, gold, yen...), but silver has yet to join the party. I think it's almost time for silver to shine, especially if we're entering the next up leg in precious metals. Silver tends to outperform gold during strong bull runs, and I plan to be slightly overweight silver. A healthy pullback would provide a nice opportunity to re-shuffle my gold and silver position.

Silver: imminent breakout


3-year silver:gold ratio

Yen Carry unwinding...look out below

Last week, the Dow broke through key long term support...



...as a result, yen carry trades have begun to unwind. When the Dow was at this level back in March, USD/JPY was in double digits and gold was at 1000. BOOYAH~

Iran Watch Part I

Buzz and banter about the possibility of an Israeli/US attack on Iran has escalated during the past few weeks. There is also an Iran War Resolution that is most likely to be approved in Congress before the fourth of July. I'm not a fear-mongerer (though fear is good for gold and silver), but I do believe that the manner in which this possible war with Iran unfolds will have a significant impact on US markets, and especially politics. With markets puking and a historical presidential election in several months, it will be interesting to see how everything ties in together with the Iran situation (maybe nothing will happen). I decided to maintain an "Iran Watch" update to keep track of anything significant that comes up.

Update on 7/1/08: OK...maybe I got a little carried away here heh~ PEACE

Interpreting FOMC Statement and New Gold Target

I'm a little busy studying for the NY bar (...yeah~), so my posts will be more short and infrequent until the end of July. There's no need to dissect every word on today's fairly bland FOMC statement, but I think there are two important takeaways: (1) the statement was not hawkish; and (2) the statement mentioned that "the committee expects inflation to moderate later this year." Despite the neutral stance, I think the statement, taken as a whole, should be interpreted as dovish. According to interest rate futures, there's a 75% chance the the Fed will raise rates 50bp by December, but I strongly believe that such expectations will reverse as the economy and stock market weaken into Q3 and Q4.

This morning's positive crude inventory numbers sold off crude, which pulled down gold as well. But following the FOMC statement, gold quickly rebounded to form a big hammer for the day. The euro closed above $1.56, and it should continue to rise and test $1.60. Gold is going through a pretty complex and prolonged consolidation, but it will come to an end fairly soon. At this point, I would like to make an important forecast for gold: a break above 920 by the end of next week. If this forecast doesn't materialize, I might have to reconsider gold's outlook for the next couple of months.

Gold: dissecting today's sell-off

Before y'all put your bear hats on, allow me to drop a couple cents for the bulls (across all time-frame). Just because we had a $25+ sell-off doesn't mean the fundamental picture for gold has changed one bit (see below). I love short-term technical trading, but fundamentals provide a floor to the market, and it's what drives the market in the end, especially for an asset like gold (that's right Gartman, gold is an ASSET). So I must disagree with any calls for a drop below 850. I'd go as far as to say that gold will not go below today's low (875), but hey...if it does, then the strong hands will be backing up the truck. Mining stocks seem to support my view, as they actually posted a gain for the day.

Again...before putting on your bear hats, let's dissect what led to the "big" sell-off in gold this morning. It was initially triggered by a very weak manufacturing data release in Europe, which led to a sell-off in EUR/USD. This led to a sell-off in gold, which accelerated/exaggerated as stop-loss orders were hit with no buyers to be found. Moreover, today's drop may have also been nudged a little harder by those who are massively short 900 calls that expire this Wednesday.

I attached a chart to depict the vacuum that gold fell through this morning. The chart shows the volume traded at each price level since last Thursday's close at (898). I chose this time-frame because Thursday's breach through the down-trendline (since the end of May) attracted some fresh longs (of course, these longs are now out of the market). Indeed, we can see a decent volume of fresh longs (above 900) made across the global market up until Friday's close. But the up volume was by no means significant, because the strong hands are waiting for the FOMC meeting, and that's also why gold fell through a vacuum this morning.



Wrapping everything together, I think today's sell-off was a re-test of last Thursday's breakout. A re-test is always healthy for a significant breakout, and a break above the infamous 910 resistance level, and ultimately the larger down-trendline since mid-April, should confirm a new medium/long term up-leg.



Fundamentals, fundamentals, fundamentals...why buy gold?

1. Oil: Peak oil is here, and here to stay.
2. Dollar: Forget about raising rates...Fed may have to cut even more.
3. Money Supply (i.e. inflation): Gold is rising against all currencies because all central banks are printing fiat like there is no tomorrow.
4. Safe haven: US treasuries will soon lose its status as an "artificial" safe haven due to rampant inflation. Gold has been a safe haven for 5000 years.
5. BRIC: Don't underestimate gold demand from BRIC and the Middle East.
6. Supply: On top of rising production costs for gold producers, there hasn't been any new major discoveries...hence the coming merger boom in the mining sector. Got junior?
7. Insert obvious gold fundamental here.

Gold: potential negative gamma environment

I made a chart (below) showing the concentration of gold call options that expire by December 2008. Notice the large concentration of open interests at $900, $950, and $1,000 - a potential negative gamma environment. The impact of the negative gamma effect will be significant if the calls were predominantly sold by financial traders rather than producers (because producers usually don't delta hedge). The former seems more likely, considering the fact that many gold producers have been abandoning their hedging programs as of late. If the correction/consolidation is near its end, and gold is about to move higher, a rally from $900 to $950 (even $1,000) could happen very fast. This scenario seems similar to the negative gamma effect in crude last year.

Source: COMEX


Let's just hope that last week marked the end of gold's correction. But what about seasonal factors? I'm tired of hearing about seasonal weakness in gold during the summer...this market is different than any other from the past; gold is not going to wait for you to vacation on the beach and come back in August. But what about potential deflation? I'm also tired of hearing about deflation killing gold...during deflation, cash/money is king, and GOLD IS MONEY. For now, the focus should be on INFLATION, even though deflation may set in later as we face a potential great depression.

Gold: 6-month

Gold: nice breakout, but not enough

The chart below speaks for itself. The spike came while eur/usd and crude were down, making it even more impressive. But crude continued to sell off on news that the Chinese government will be raising fuel prices, which would curb demand. Nice sounding headline, but it's meaningless, and I'm not even going to explain why. Today's crude action is most likely due to contract expiration, if anything, but it did put pressure on gold, which trickled down to close below $900. Gold needs to finish strong tomorrow to wrap up a nice week for bulls.

Yamana: back up the truck

I'm starting to like these diamond patterns...



Update: because diamond reversals are rare, and frankly I've never heard of the pattern until recently, I'm putting up a historic example of a diamond reversal that worked out well for bulls.

Dow breakout to all time high last year:

A diamond lasts forever...

Gold: imminent breakout?

This consolidation is really testing my patience, especially last week when gold traded below $875 following a $50 sell off in less than two trading sessions. But I've held on, and good things come to those who wait.

The chart below is the best I can make of what's been going on: two small falling wedges within one large falling wedge. The first small falling wedge broke on 6/6 by Trichet's speech during the ECB meeting, and the second small falling wedge broke yesterday following a disappointing (for dollar bulls) G8 meeting and a crude rally to $140. Yesterday's gold rally stopped dead at the upper boundary of the large falling wedge.

Gold: 1-month


So what's next? Gold is either going to violently break out of the large falling wedge or fall to the lower boundary. Fundamentally, we have a shift in Fed tone (slightly dovish), and tomorrow we have crude supply data coming out. Another bullish factor is that the GLD trust has been slowly increasing its gold bullion inventory. Although this probably doesn't matter much in the short term, the GLD trust bought 12.27 tonnes of gold, TODAY ALONE: look at the last two lines on the table below.

Shift in Fed tone: slightly dovish

It's about midnight right now, and euro/usd has rallied more than 70 pips since today's NY close. The catalyst seems to be a shift in the Fed's hawkishness, with some senior Fed officials worried that the market has overreacted on Bernanke's dollar jawboning.

To put this in poker context:

Market: call...
Fed (trying to bluff): raise 25bp...
Market: re-raise 75bp!
Fed: uhhh...I fold