PRUDENT OBSERVER

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2008-07-23T22:49:00.002-04:00

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Short dollar trades reverse

2008-07-22T08:35:00.000-04:00

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

2008-07-22T07:47:00.000-04:00

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...

2008-07-20T15:38:00.006-04:00

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

2008-07-14T19:36:00.008-04:00

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

2008-07-13T22:09:00.008-04:00

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

2008-07-13T21:35:00.012-04:00

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

2008-07-11T06:11:00.004-04:00

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

2008-07-11T01:55:00.005-04:00

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

2008-07-09T22:38:00.004-04:00

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

2008-07-09T08:48:00.005-04:00

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?

2008-07-09T08:36:00.002-04:00

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

2008-07-08T23:41:00.003-04:00

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

2008-07-07T06:25:00.003-04:00

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

2008-07-03T08:37:00.002-04:00

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

2008-07-02T19:21:00.006-04:00

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

2008-07-02T18:51:00.003-04:00

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?

2008-07-02T12:37:00.004-04:00

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...

2008-07-01T00:35:00.007-04:00

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

6-month gold futures

Bite the silver bullet

2008-06-30T01:53:00.001-04:00

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

2008-06-29T23:12:00.002-04:00

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

2008-06-29T19:01:00.006-04:00

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

2008-06-25T20:44:00.004-04:00

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

2008-06-23T23:11:00.011-04:00

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

2008-06-20T01:11:00.009-04:00

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

2008-06-19T22:37:00.003-04:00

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

2008-06-18T23:23:00.004-04:00

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...

2008-06-18T13:02:00.005-04:00

Gold: imminent breakout?

2008-06-17T22:58:00.012-04:00

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

2008-06-16T23:59:00.005-04:00

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

Violent shakeout continues

2008-06-16T07:05:00.000-04:00

What a volatile day! Crude traded a couple cents from $140 before plunging $7, but still closed in the green...wow. Gold tested the upper boundary of the falling wedge, but failed to break out. Gold fell more than $10 from the day's high, but still closed in the green. Silver took a peak above the water, and remained quite stable throughout the volatile action in crude and gold. With contract expirations around the corner, there's a violent battle going on between commodities bulls and bears right now. We will see who emerges from the dust very soon.

Crude: 1-month

Gold: 1-month

Silver: 2-week

Expcet rise in volatility

2008-06-15T18:08:00.004-04:00

Volatility across macro markets should increase even more as we approach Fed day on 6/25. Especially, I expect wild moves in crude, gold, and silver, which should provide an opportunity to cover some longs. I also expect the markets to set up for a real test of Bernanke's recent open mouth operations (i.e. dollar down and commodities up). Come Fed day, things might get ugly as Bernanke re-emphasizes his hawkishness and support for the dollar. But this will only provide more buying opportunities for commodities bulls.

Smile from ear to ear

2008-06-14T14:32:00.003-04:00

Almost!

Last line of defense for gold: falling wedge

2008-06-14T14:22:00.008-04:00

We're either at the cusp of the next bull leg or a total break down of gold in the medium term. This week's extreme dollar jawboning has severely ruptured the right shoulder of the inverse H&S reversal I've been anticipating. Despite heavy selling in gold, downward pressure seems to be losing momentum, and the bears could be setting themselves into a trap. My new call is a for a falling wedge reversal, with strong support at the 200-day SMA. I hope to see a break to the upside within the next week...the market needs to wake up and call Bernanke's bluff!

Medium term falling wedge (1 month chart)

Long term falling wedge (8 month chart)

Tough week for dollar shorts

2008-06-13T19:07:00.004-04:00

Despite ugly job numbers last Friday, the dollar quickly reversed to the upside on the back of dollar jawboning. I'm surprised at how much impact the open mouth operation has had on the markets. The yield curve has flattened significantly with short term yields shooting to the sky...this can't be good for banks. The dollar rally must stop.

Precious metals technical update

2008-06-08T17:55:00.005-04:00

Gold: There is a potential inverse head and shoulders reversal, and a break above the neckline with strong volume will be very bullish. I made a premature call on an inverse head and shoulders at the end of April, and the problem was that there was no prior downtrend to reverse. This time, there is a clear prior downtrend to reverse.

Silver: I think the range-bound consolidation during the past few months is coming to an end. A break above $18.5 with strong volume will be very bullish.

Unemployment rate 5.5%, gold up $20+

2008-06-06T12:48:00.010-04:00

I thought BLS would be a bit more creative with their hedonic adjustments, but job numbers came out pretty bad. Also, please spare me the lame excuse on student unemployment; the impact of teens is de minimis.

Dollar bashing continues from yesterday, and gold is up more than $20. Gold spot is facing resistance at $900, and it would be reassuring if gold closed above $900 ($903 for August futures) to finish a roller coaster week in markets.

Contrarian view...it's HAMMER time!

2008-06-05T23:57:00.003-04:00

So many people are bearish on gold right now! Setting aside the usual haters, even gold bulls are betting that gold will "retest $850." What is the basis for this "retest" other than sheer disappointment for missing the boat when gold hit $850 on 5/1. Is it fundamentals? Is the credit crunch and recession over? Or is it what elliot wave counts are signaling?

In today's Gartman Letter, Gartmam recommended that everyone should "sell gold short immediately upon receipt of this commentary." Well, I bought gold immediately upon receipt of his commentary. Why? Because I think it's time to take a contrarian view on gold...and honestly, with the overnight reversal on the the dollar and crude rallying almost $7 today, I don't think my view is contrarian anymore.

I must say I was a bit disappointed that gold did not participate in today's dollar bashing (euro and crude) as much as I would've liked, but I think gold may have been under some pressure due to short covering in stocks and a sell off in bonds. Tomorrow's job numbers will make things really choppy, and we may even see a better number than the estimated -60k. I mean it's clear that people are losing jobs, and I think the market is pretty well aware of the fallacy behind the BLS birth/death model. At the end of the day, a gold rally regardless of a good or bad job number will signal a significant defeat of the gold bears for the medium term.

Gold did sell off to about $865 early this morning, but the bulls charged back to form a sizable hammer for the day.
Gotta believe in the hammer!

What dollar rally? Trichet crushes Bernanke

2008-06-05T19:08:00.006-04:00

This week, Bernanke stepped up his support for the greenback during a conference in Spain and a class day speech at Harvard's graduation ceremony. Stating "significant concern" over the falling dollar's impact on inflation, Bernanke made it clear that the Fed is done cutting rates. His remarks sparked a sharp sell off in bonds and commodities, with crude falling about $8 and gold falling about $30. However, all of Bernanke's efforts became undone overnight when Trichet of the ECB explicitly opened the possibility of a rate hike during the ECB's next meeting in July. The dramatic reversal is evident in the charts of EUR/USD and crude below. This is truly: in your face. The Fed might as well stop talking about holding/raising rates because we are about to see Credit Crisis Part II, while the housing market continues to derail in a slow motion train wreck.

EUR/USD

Crude

Below is a three-year chart of the USD index. Do you see the dollar rally everyone's been talking about?

Update on gold: bottom for real

2008-06-05T16:20:00.000-04:00

I mentioned on Monday that gold was looking a bit shaky, and with a one-two punch by Bernanke, gold sold off by about $30 during the past few days. I did have an opportunity to short gold at about $890, but I reversed my position this morning at $875. I hate being short gold, and I'm relieved to be long again. The bottom might be for real this time.

From my post on Monday...

At today's close: possible bear trap...

Revised gold outlook: neutral/bearish

2008-06-02T23:11:00.006-04:00

This is a very short term outlook (few days), but I am neutral/bearish on gold. I covered my long at today's close, and I am even considering shorting if gold goes below 890. Despite today's ugly news from financials (UK's Bradford & Bingley and S&P downgrade fest), gold action was FAR from satisfactory. Gold could not penetrate 900 with convincing momentum...very pathetic. If gold can't clear 900 tomorrow, I think it will sell off to about 870-875 this week.

Gold: the bottom is in

2008-05-29T23:27:00.006-04:00

Here is a synopsis of the gold market during the month of May. Gold made its low on May 1 when it momentarily dipped below $850/oz. Since then, gold broke out of a two-month long correction/consolidation when it surged above $900/oz on May 16. Gold topped out at around $935/oz on May 21, and this was the day to "sell in May and go away." During the past week, gold has been put to the test and sold off by about 60 bucks to today's low of $870/oz. I think today will be the last day we see gold trade below $880/oz; the bottom is in. Gold will most likely consolidate over the next month or two within the blue triangle formation shown below (880-920). This period will be the last chance to accumulate ounces and mining shares before gold permanently moves into four digit land.

There has been much talk about the need to raise interest rates to curb inflation, and such notion has propped up the dollar during the past week. But with the housing market still far from any signs of recovery, an interest rate hike is all talk and no trousers. Indeed the Fed is running out of room to cut interest rates, but this only means that the Fed will have to resort to outright quantitative easing. As for the recent dollar rally, I think it is ovah. Perhaps tomorrow's consumer sentiment data will kick things back into motion (i.e. dollar down gold up).

Euro is losing steam

2008-05-28T23:57:00.004-04:00

Chart looks pretty ugly. This could be bad for PM, which is already getting pounded this week. Also, with a potential bond correction around the corner, we may seem some deleveraging across the board.

Gold : Crude Ratio

2008-05-22T23:37:00.002-04:00

Today's sell-off in crude dominated the headlines, as equities rebounded and precious metals got whacked. There was much talk about how a correction in crude will bring down the precious metals market, so I made a chart (normalized) comparing the performance of gold to crude. Note the dramatic reversal since Jan 2008.

If there is any merit to mean reversion and the historic correlation between gold and crude, we should see the gold:crude spread climb back up...but will this happen through a massive sell-off in crude or a strong rally in precious metals? With tightening oil fundamentals (peak oil!), soaring inflation, weakening fiat, and deteriorating market confidence, the latter scenario seems more likely.

BlackRock Buys $15bn UBS Debt

2008-05-06T02:19:00.002-04:00

From tonight's FT headline:

"BlackRock, the US asset manager, will pay UBS $15bn (£7.6bn) for a portfolio of subprime mortgage debt in a deal that the Swiss bank plans to announce on Tuesday with its first-quarter results, people familiar with the transaction said."

Seriously, someone's been smoking too much black rock.

Almost time to start accumulating gold

2008-05-01T07:58:00.004-04:00

With the dollar and equities on the rebound, capital has been gushing out of commodities. How did we manage to go from crisis to recovery in a matter of couple months? I suppose one could applaud the Fed for engineering such a quick recovery (TAF and whatnot), but shouldn't the natural course be: crisis --> RECESSION --> recovery? Perhaps the market over-panicked during the crisis stage, and any bit of optimism relative to Q1 2008 will be seen as a complete recovery: much like a big pendulum swing. I believe the Fed has exhausted itself during these massive pendulum swings, and has temporarily gone into neutral mode...hoping for the best. Over the next few months, I think the pendulum swings will slow down (i.e. markets will go sideways). As people re-evaluate economic fundamentals, which still point towards a deep recession, we should also see a consolidation in the gold market. A ranging market is something most gold bulls have been waiting for, and it will be the last opportunity to accumulate ounces and mining shares before three-digit gold becomes history.

Update on 5/29/08: I no longer think gold will trade to 850. Gold will most likely consolidate between 880 and 920 before resuming its next leg up. I should have loaded up on the day I wrote this post.

TOP in POT

2008-04-28T22:27:00.006-04:00

POT (largest potash and nitrogen fertilizer producer in the world) has seen a dramatic rally during the past year, which has recently gone parabolic. The cultivation of corn is the largest use of potash fertilizer, and POT has benefited from a dramatic increase in the demand for corn, not only from rising global demand, but also from the ethanol craze that began a couple years ago. But corn-based ethanol is probably one of the worst policy decisions made by the US government, and I expect the ethanol craze to quickly disappear as more and more people realize its detrimental impact on sky-rocketing grain prices. There is significant downside risk to POT if there is a reversal in the government's policy on ethanol. The rising price in natural gas may also start to hurt POT's profit margins with respect to its production of nitrogen fertilizer. Moreover, there seems to be some more correction left in the commodities complex, which will add more selling pressure. Technically, it's hard to ignore the RSI divergence and the massive weekly doji that formed last week. A big down bar this week could very well signal a TOP in POT.

Jim is predicting a correction in POT that is similar to that of FXI, which had also gone parabolic before correcting by over 45%.

Dollar rebound and gold correction

2008-04-24T22:10:00.008-04:00

The euro had a large sell-off due to weakening European fundamentals and dampening US rate cut expectations. Crude also had a large sell-off after inching above $119. Moreover, market sentiment has completely turned around with major players calling an end to the credit crisis. Under such pressure, gold sold off to below $900/oz and broke below a major trendline. I think gold will continue to sell-off to the 50-week MA, but prices should pick up again during the second half of this year. We have only seen the tip of the iceberg...so the best strategy right now is to patiently wait for the dip.

T. Boone Pickens style...

2008-04-23T12:10:00.003-04:00

Gold hit $899.20/oz this morning. I WAS WRONG.

$950 before $900?

2008-04-22T21:02:00.004-04:00

Gold has formed two inside days in a row, each with strong volume. Today's headlines were filled with news about the euro's rise above $1.60, reminding the markets about the ECB's determination to fight inflation, even if it has to raise rates. This is indeed a drastic contrast to the Fed's primary mandate of stabilizing the markets at all costs, both financially and (il)legally. Considering such contrast to the ECB, it would be nice to see some vigilante action in gold to test the guts of the Fed. I would go so far as to say...$1000 before $900!

Gold might surprise everyone: reversal?

2008-04-21T20:09:00.011-04:00

Following a nice rebound during the past few weeks, gold had a large sell-off last Friday. The catalyst for the sell-off was a sharp rebound in the dollar. Although the Euro and Yen have retraced all of their losses from last Friday, many gold bulls are raising doubts (Gartman covered his ENTIRE gold long at $922/oz). Many gold bulls are also expecting an intermediate-term range capped at $960/oz. But with a slew of economic data coming out in the next two weeks, I think gold will surprise everyone on the upside in the short-term. Gotta believe in the fundamentals!

From a technical point of view:
1) There is a potential inverse head and shoulder pattern. Anything above the blue neckline will be very bullish.
2) Today was an inside day, and an inside day is usually followed by a rally.
3) There is RSI divergence.

Even if there's intervention in gold (or dollar), so be it...more fuel for the gold rally.

Wheat technicals

2008-04-21T01:10:00.002-04:00

Are we near the bottom of the wheat correction?

Interpreting today's wild action in macro markets

2008-04-18T23:11:00.002-04:00

The dollar rallied hard today, triggering a sell-off in euro, yen, and pm. I have been anticipating a new leg down for the dollar, but today was not my day. So does this mean the dollar has bottomed for now, in the intermediate term? Fear and panic have indeed subsided in the US market, but the fundamentals are the same, if not getting worse. Moreover, pm could very well decouple from the dollar. Technically, however, it's hard to rule out further correction in euro, yen, and pm.

All eyes will be on whether stocks will be able to retrace this year's losses. If so, the price of bonds will break to the downside, which may cause a bit of deleveraging by hedge funds that have been long bonds (and even gold).

Today proved how difficult it is to have a short term edge in a potentially consolidating macro markets, but perhaps it will be a better strategy to patiently accumulate pm and pm stocks until we see clear move to the upside.

Euro bulls taking charge?

2008-04-17T19:04:00.006-04:00

The battle between buyers and sellers of EUR/USD around the $1.5850 level has intensified during this past week (notice the rising volume). It will be interesting to see how the Euro finishes the week. I think we'll see $1.60 by tomorrow morning.

People need to accept the reality that a strong EUR/USD is a good thing for US stocks (not so much for European exporters, but who cares about them?).

Earnings uncertainty: buy Yen protection

2008-04-17T11:44:00.003-04:00

Following yesterday's impressive rally in equities, Yen dropped down to 102.35. Yen was trading at pretty strong support this morning, and I think 102 is a good point to buy Yen. Indeed markets have calmed down significantly during the past few weeks. But uncertainty in earnings seems to be stoking some volatility and risk aversion, so I think it will be prudent to hold some Yen until we clear through earnings season.

Short silver at target ($18.750/oz)

2008-04-17T10:39:00.004-04:00

Silver has reached a strong resistance level at $18.750/oz. Looking at the dollar action overnight, the greenback does not appear to be as bearish as it did yesterday. Gold is also pretty close to my target of $960/oz. I am shorting silver at $18.750/oz to hedge my short dollar bias, though I will be ready to cover at moment's notice.

Update: covered silver short @ $18.220/oz

What volatility?

2008-04-16T23:02:00.000-04:00

Jim has pointed me to a nice chart of VIX. The chart shows how much volatility has come down during the past few weeks. Perhaps this is a sign to buy a little protection.

Euro and gold: imminent technical breakout

2008-04-16T08:39:00.002-04:00

Good morning. My trading screen is blinking green for literally all assets (ex bonds)...sometimes you can just feel capital flowing back into the markets. The underlying force of this reflation is of course the dollar. One cannot ignore the major interest rate differences between the US (2.25% and going DOWN), Europe (4%), and Japan (0.5%) - the dollar is the new carry currency.

Technically, euro and gold are poised to test major resistance levels. The Euro has strong resistance at $1.590, while the 50-day moving average ($945/oz) provides strong resistance for gold. Many market commentators have been calling for a rebound in the dollar (rebound in US credit market), so going long the Euro and gold seems to be a nice contrarian trade.

According to this morning's inflation data, price levels are rising faster in Europe relative to the US (bullish for Euro). Bullish crude data could provide more fuel to Euro and gold.

Short term targets:
Gold ($960/oz)
Euro ($1.615)

Good point to buy YAMANA

2008-04-15T02:49:00.002-04:00

Mining stocks have not rebounded as strongly as the metals. Some interpret this as a sign of non-confirmation of the rally in futures. However, gold is poised for a short term breakout, and I think this will pick up AUY back up from its feet. If there is a strong rebound in AUY, then it would be safe to say that $14 is history.

Gold short term bullish

2008-04-15T02:24:00.002-04:00

The price of gold is poised to test the upper boundary of its recent one-month consolidation (triangular formation). Crude oil continues to rally into unchartered price levels, providing fuel to the Euro and precious metals. Short term target for gold is $960/oz.

Reflation picking up...

2008-04-07T10:21:00.003-04:00

Good morning. Reflation is inching back, and risk appetite seems to be cautiously on the rise. Euro/Yen broke through 160 overnight, while both stocks and commodities rallied hard. Sacrifice the dollar, and everyone will be happy.

Gold and silver look very bullish

2008-04-03T19:43:00.000-04:00

Despite recent volatility, precious metals have painted a nice technical sell-off. Gold and silver have sold off to November 2007 highs, and I believe they have bottomed. Near term resistance seems to be $960/oz for gold and $18.750/oz for silver. Both metals will probably consolidate around these levels before rallying to new highs.

Precious Metals Bottoming...

2008-04-02T23:33:00.001-04:00

Precious metals have plummeted along with the rest of the commodities complex. The deflationists seemed to prevail over the inflationists. Moreover, the financial crisis seemed to be miraculously cured by the Fed/Treasury/Administration. Wrong and wrong...the fundamentals have not changed one bit. Indeed, deleveraging during the past week and a half has been severe (gold sold off the most in a quarter century). Gold and silver sold off to levels we haven't seen since the end of last year - the same time massive speculation in both markets began. But the sell-off has been very technical, providing low risk opportunities to short.

The ultimate question has been when the precious metals would bottom. Obviously, such bottoming would occur when long term buyers dip in and speculators realize that the current crisis is far from over. Although many believe the precious metals sell-off to occur over a longer period of time, I believe we saw the bottom today. Many expect gold to sell off to $850/oz and silver to sell off to $15/oz (both are pretty obvious support levels), but this is turning out to be wishful thinking. Today, gold and silver sold off to their highs reached in November last year - a good level to start buying.

He who wins is he who owns the most ounces...

BSC's last drop of blood

2008-03-17T07:15:00.003-04:00

-99% in 6 months...

A closer look at SLW: so beautiful, so bullish

2008-03-17T07:11:00.001-04:00

Every once in a while, you come across a chart that is just screaming at you to go long. This morning, I took a long hard look at a 1-year chart of Silver Wheaton (SLW), and it sure as hell screamed out loud. It gave me deafening comfort that I'm long SLW calls.

Right now, SLW looks very bullish both fundamentally and technically.

Fundamentals:
Inflation is soaring, dollar is toppling, and Ben is going to cut +75bp tomorrow. Gold has been getting some press for shattering $1000/oz, but silver continues to outperform gold in the background. SLW's silver production remains unhedged, and SLW will take full advantage of further growth in the price of silver. There is potential downside risk if the stock market crashes, but SLW has been diverging from the broader stock market since the serious sell-offs began back in January.

Technicals:
Looking at the chart above, SLW has been consolidating ($14.5-$18.5) during the past six months. SLW took a breather after a powerful 80% rally during the fall of 2007. SLW has also been taking pressure from a tumbling stock market, causing it to lag behind silver futures during the past few months. But with silver futures continuing to soar to record levels, SLW will re-align itself with silver prices. The chart at the bottom shows that the SLW:Silver ratio is rebounding from a strong support level. Looking at other technicals for SLW: volume is rising noticeably, momentum indicators are pointing up, and the long term trend is looking strong. My SLW 20 calls (50 cents away from being ITM) will expire in four days. If Bernanke reflates aggressively tomorrow, my best case scenario will be for SLW to test the upper boundary of its current uptrend (around $22.5) before expiration.

Silver Wheaton (SLW) vs Yamana Gold (AUY)

2008-03-14T12:27:00.005-04:00

My two favorite stocks. Which one will reach 20 first? I own some March SLW calls with 20 strike, so I would like to see SLW rip through $20 by next Thursday. A quick glance at the chart of AUY indicates potential resistance at $20.

Update: SLW and AUY closed neck and neck.

Update: AUY WINS

MoM CPI Unchanged!

2008-03-14T08:38:00.004-04:00

Good morning. Today's data indicates that consumer prices in the U.S. were UNCHANGED during the month of February. If I'm not mistaken, energy and commodities prices were surging to historical levels throughout February. Bloomberg news is citing dropping fuel costs as the cause of last month's CPI, but whatever the cause may be, inflation rate is most certainly NOT unchanged.

Looking at initial market reaction to the CPI data right now, the dollar seems to be slightly bid, as cooling inflation should support the greenback. The yield curve is also flattening. But considering that Fed day is just around the corner, I think the market will interpret today's CPI data as giving Bernanke more room to cut rates. This should be bullish for both stocks and commodities (extra bullish for mining stocks).

Sell off in all assets...

2008-01-17T22:57:00.000-05:00

With prices across all assets breaking below key technical levels, we may see some deep sell offs in stocks, commodities, and forex. The notion of a recession seems to have settled within the mainstream, so there is more room to short various markets. The key will be on timing, of course, and a trader who is short the market should not be faked out by sharp intra-day rallies. The biggest challenge, however, is choosing the right moment to cover and go long. A market reversal to the upside will be hard to time, and highly dependent on action by the Fed (forget about fiscal stimulus). Good luck everyone.

2008 Forecast

2008-01-01T09:01:00.000-05:00

1. Fed funds rate: 3%
2. Crude: $125
3. Gold: $1,100
4. Silver: $22
5. Nikkei: 22,000
6. My weight: 155 lbs
7. Google: $900
8. China (FXI): $400
9. Beer 6-pack: $20

HAPPY NEW YEAR!!!

Mixed data + low holiday volume

2007-12-28T10:16:00.000-05:00

After news of Bhutto's assassination sparked a rally in gold, crude, and bonds, we saw lower than expected durable goods orders and higher than expected consumer confidence numbers, providing a mixed view of the U.S. economy. Considering the seasonally low volume across all markets (happy holidays!), I must assume that any market movement right now is just noise. I don't know why I'm looking at markets when I should be getting wasted instead!

Gold breakout not confirmed by volume

2007-12-27T05:18:00.000-05:00

For those following the gold market, the ultimate question has been whether the current triangular formation will result in a breakout to the upside or the downside. Indeed, the two-month consolidation in gold is very near its end, and we will probably see a breakout by the end of the year (or early January). Considering the recent dollar rally, along with seasonal factors supporting the dollar during the months of December and January, I have been anticipating a breakout to the downside for gold: a drop to $760-$775 would be a great buying opportunity for gold's ultimate ride to $1,000 and beyond. During the past week, however, gold has seen a strong rally from $790 to $830.

Although the triangular formation for Feb. Gold futures (shown above) seems to be intact despite the current rally, other gold charts such as GLD and Gold EOD (shown below) are showing signs of a breakout to the upside. Such breakout to the upside, however, should be dealt with caution. This is mainly because the current rally has not been supported by volume. I would expect a breakout from a two-month consolidation to be confirmed by well-above-normal volume, but this is not the case.

So...with the consolidation near its end, is gold going up or down? I think gold will cool off from its current rally (perhaps we will see positive durable goods and consumer confidence numbers today), and eventually break to the downside during the first week of January when we get an onslaught of economic numbers: manufacturing, FOMC minutes, employment, ECB rate decision. If not, we should see gold shoot above $850...hopefully with some strong volume!

Chart of the month: euro sell-off

2007-12-20T06:55:00.000-05:00

The chart below (March EUR) really sums it up. Once again, the Economist cover contrarian trade prevails. With models and rappers talking up the euro, a dollar counter-rally makes sense. Euro has sold off to my initial estimate around $1.43 (post below), and it may continue to sell off, pending future data. But I'm expecting not much action until year-end, at least not until we get US payroll data and ECB rate decision during the first half of Jan. 2008.

Dollar is bid...euro, gold, silver under pressure

2007-12-14T08:45:00.000-05:00

Yesterday we got big retail numbers and the dollar rallied hard, causing euro, gold, and silver to sell off. Today's inflation numbers diminished rate cut expectations, and intensified the dollar rally. Although the Fed has dropped its previous language of balance between growth risk and inflation risk, the Fed has not given the market a clear signal that it will give priority to growth risk. Instead, the Fed has unveiled a new plan to soothe global liquidity problems. The response from the stock market was temporarily bullish, but short lived as doubts were raised as to the plans novelty and its ability help resolve the real underlying issues of inter-bank liquidity: housing and credit crisis. What we really need is for the Fed to break out of its "gradualism" and be more aggressive. Of course, the Fed will eventually have to resort to aggressive measures...it's just a matter of time before we see more pain in the US economy.

In the meantime, looking at the euro, the big question is how far will it drop. My guess is around $1.43, and then I think it will range until early next year, or at least until we see more pain in the US.

Euro/$ puts pressure on gold and silver

2007-12-13T07:13:00.000-05:00

Weakness in the European economy, especially the money market, seems to be intensifying. Yesterday's global central bank coordination announcement revealed more serious liquidity problems (or as some say, insolvency) among banks in Europe. So I think this announcement may have created more fear, at least in Europe, rather than soothe the markets. Consequently, the euro is currently under a lot of pressure (shown below), which is also having an impact on gold and silver. Despite yesterday's rally, sparked by the Fed's new plans for capital injection, it is important to remember that the Fed still disappointed market expectations concerning the fed funds rate. A euro sell-off may very well bring gold and silver down to $760 and $13.5. Retail sales are expected to come out strong, while inflation numbers are expected to come out high. So watch out for a sell-off in euro, gold, and silver!

Has crude bottomed?

2007-12-12T07:06:00.000-05:00

With inventory numbers coming out today, I need not explain how important they will be for crude: just look at the chart below. I think crude has bottomed, and a clear break above 90.625 would be very bullish. We may very well see $100 traded by the end of the month.

Gold and Silver: Post-FOMC (what were they thinking?)

2007-12-12T05:32:00.000-05:00

First, a comment on yesterday's Fed decision: what were they thinking? Ohhh...so this is what they had in mind: a new money pumping machine! Indeed, markets have reversed sharply overnight.

An important debate in recent weeks has been whether gold would correct to $780 or break below $780 to pre-October levels of $740-$760. Similarly, traders debated whether silver would correct to $14 or break below $14 to pre-October levels of $13.25-$13.50. Indeed, the recent volatility in the gold market (silver has been less volatile, surprise) has made it impossible to find a clear direction. Two weeks ago, gold went from $780 to $845, and then back down to $780 in just matter of ten trading days!

Despite all the noise during the past month, gold and silver seem to have slowly consolidated above $780 and $14. I think we will see a rally to re-test November highs.

One caveat would be the the impact of the euro on precious metals, as investors see gold as a hedge against weakening dollar. Both the dollar and the euro are depreciating due to excessive money supply, and the euro/dollar exchange rate has become a function of which central banks inflates the most. So precious metals should eventually decouple from its relationship with euro/dollar, because gold has been, and will continue to, appreciate against all major currencies. For now though, it seems like the recent dollar rally has come to an end (shown below).

Gear Shift in Gold: acceleration mode

2007-11-02T13:47:00.000-04:00

Stocks sold off yesterday on diminished rate cut hopes, and precious metals also experienced selling pressures. While silver futures sold off all the way to 14, gold futures held steady at 790. I have been silver-biased for a while (perhaps because I was long silver during its parabolic rise in early 2006), but after experiencing a blow to my pnl yesterday, I acknowledge that gold is better. Silver may tend to outperform gold during strong rallies, but silver is more volatile and vulnerable during times of risk aversion in the markets (like right now: look at bonds). Gold has shifted gears to acceleration mode (chart below), and interestingly, the start of the new uptrend line coincides with the 10/19 stock market sell off. Don't forget that the Fed has cut 75 bp in the past six weeks, and there is still a lot more reflation to go. Everybody is talking about $100 crude, but it won't be long before we hear $1000 gold in the media.

Thoughts before Fed announcement

2007-10-31T10:13:00.000-04:00

Good morning. Today is Fed day, and the markets have taken some risk off the table during the past two days. Crude, gold and silver saw a sharp sell off as traders took profit ahead of Fed day. My positions were also stopped out, but I did notice that euro/yen and nzd/yen were not budging. Let's also not forget that reflation is still in tact. A positive market reaction to the Fed today will probably send bond prices to 111-112, while gold will break above 800. There is a lot of talk about how the Fed must meet market expectations (futures predict 95% of 25bp cut), and we will most likely see a 25bp cut. If the Fed doesn't meet market expectations, things could get really nasty.

Bullish on tech stocks?

2007-10-22T21:35:00.000-04:00

The key issue right now is whether the housing virus is spilling into the broader economy. Weak earnings in manufacturing (domestic) and financials are indicating a possible spillover. Although the employment situation seemed pretty positive last month, it may be only a matter of time before employment numbers break lower. Despite this ongoing debate about a possible recession, tech stocks have outperformed the dow/s&p since the subprime crisis came to light. Also, look at the bottom graph to see how the nasdaq is still very undervalued relative to the dow. Compared to the late 90's, technology in many sectors (consumer, internet, alternative energy, healthcare etc.) has advanced dramatically (also increasing global market share), and it will be interesting to see how tech stocks weather through increasing U.S. recession pressures. Last week's Google earnings and today's Apple earnings are bullish for tech stocks.

[NDX/INDU: 2-year chart]

[NDX/INDU: 10-year chart]

Fukui meets Bernanke: who will inflate more?

2007-10-22T13:48:00.000-04:00

On the 20th anniversary of Black Monday (10/19/87), stocks sold off sharply, fueled by renewed recession fears. Consequently, the yen traded to pre-fed rate cut (9/18) resistance of 113 as carry trades were unwound. Although a more dovish BOJ may help sustain the carry trade against the dollar, possible spillover of the housing correction into the broader economy will force the Fed to keep cutting borrowing costs and put more pressure on the dollar. Fukui was hawkish at the G7 meeting this week, but his comments seem to conflict with the IMF's view (slowing growth and deflation) of the Japanese economy. Fukui was probably bluffing as usual.

[Dollar/Yen spot: 5-month chart]

Bonds: rally or range? The Fed would love to see a rally...

2007-10-19T00:35:00.000-04:00

Market expectation for another fed rate cut has risen sharply this week, shooting euro, yen, crude, gold, and silver through major resistance levels (silver still needs to break $14.1). Bond prices also had a strong rally to long term resistance, and a break will send bonds to 114-115. The Fed certainly does not want to see dropping bond prices and a steepening yield curve. This signals rising inflation expectations, which make it harder for the Fed to cut rates. With adjustable-rate mortgage resets in the horizon, a rate cut at the end of October is necessary; the only question is whether another rate cut will be sufficient (probably not).

[Bonds futures: one-month chart]

Gold is ready to launch...again

2007-10-19T00:24:00.000-04:00

While remaining flat during the day (perhaps as everyone's attention was on crude), gold began picking up late in the afternoon and has continued to rally into the Asian markets. Gold broke $770 and the next target (top of next box) is $790, at which point speculation will push gold past $800. But with euro/yen and stocks selling off (mentioned in previous post), gold and silver will have to withstand some potential stress.

[Gold futures: one-month chart]

Tomorrow (10/19!) might be a bad day for stocks...

2007-10-18T21:35:00.000-04:00

Euro/yen is selling off, and the nikkei has buckled below 17000 just two hours into the open, dropping more than 250 pts. Hopefully precious metals will hold up against the pressure, as the dollar will certainly slide if stocks sell off tomorrow (10/19/2007).

Yen breaks from downward trend

2007-10-18T08:21:00.000-04:00

The yen has broken a downward trend (shown below), signaling a potential unwinding of carry trades. Despite overall dollar weakness, I found it interesting that the euro and the yen have moved in almost opposite directions during the past two months. Perhaps this is because carry trades were predominantly in euro/yen. Whatever the case may be, it is nice to see both currencies starting to move in unison - up against the dollar. The housing market is obviously still a major concern, and weekly data continues to remind us of that fact (plus, more rate cuts!). I have been wary of a massive sell off in euro/yen as it may have an adverse impact on precious metals, but if both the euro and the yen rally against the dollar, euro/yen is most likely going to consolidate and trade sideways for a while. As a matter of fact, I would really like to see euro, yen, gold, and silver all rally together at the same time!

[Yen futures: one-month chart]

Copper: housing slump v. Chinese demand

2007-10-18T07:33:00.000-04:00

Copper is at long term resistance, and a pretty significant one at that (shown below). Because copper is a core resource in home building (electrical wires, pipes etc.), it is considered the best indicator (also, timely response) for the health of the housing market. Indeed, the price of copper peaked at the same time the housing market peaked during the second quarter of 2006. Consequently, the price of copper lost most of its 2004-2005 gains by early this year. Copper inventories rose rapidly, resulting from a slowing demand in the U.S. housing market which is second after China in copper consumption. Despite the rise in inventories, copper supply is nowhere near 2003 levels, while Chinese demand for copper continues to grow. The big question is whether China continues to buy copper (on top of increased efforts in mining and recycling) as the price of copper tests the current resistance level for the fourth time in the past two years.

[Copper spot: three-year chart]

[Copper inventories: three-year chart]

A Must for Silver

2007-10-17T18:53:00.000-04:00

Silver must break $14.1 by the end of this week (or early next week at the latest), otherwise it may drop to $13 (shown below). Setting aside jobless claims and leading indicators, there are no more major data releases this week which may impact fed rate cut expectations. My only concern is the performance of risky assets such as euro/yen and stocks, which are currently facing major resistance levels. Hopefully the large players are looking at the same technicals below, and realize that silver prices must break resistance to keep rallying. Only a small nudge beyond $14.1 is sufficient to send silver to $15, as haters cover their shorts and speculators rush in.

[Silver futures: One-Year Chart]

Glitch or Omen?

2007-10-16T19:43:00.000-04:00

Asian markets just opened and the silver chart below scared the hell out of me!

Possible Risk Aversion

2007-10-16T17:31:00.000-04:00

Risk appetite may be due for a correction. Looking at the euro/yen cross rate (shown below), one can see how fast global risk appetite (yen carry) has bounced back since the recent fed rate cut. Things could get nasty if euro/yen does not hold 165. Despite a stabilization in credit liquidity, the housing market is getting worse day by day, while banks are laying off employees and reporting lower earnings. So what's there to be optimistic about? Just in case, I have hedged my long gold and silver futures with puts on banks.

Thoughts on ABX Index, market sentiment...

2007-10-16T03:06:00.000-04:00

The ABX Index is in the news again, with the current series falling to August levels as Moody's announced further downgrading of subprime ratings. From Wall St's point of view, liquidity in the credit market has stabilized, but are market players just delaying the inevitable write downs? Corporate earnings have been disappointing investors so far, and it will be interesting to see how the market interprets the continued onslaught of negative housing data (like tomorrow's NAHB housing market index). Expectations of another fed rate cut have decreased since the last FOMC meeting, but with two weeks left until the next meeting, market sentiment may quickly lose its current optimism.

Silver v. Gold

2007-10-15T19:23:00.000-04:00

Today, crude and gold prices broke into unchartered territory; they are rallying into the Asian markets as I write. For those who have missed this massive rally since August, there may not be a pullback for a while. Trade volume for crude and gold have surged during the past couple months as smart money (inflation up, buy gold) began piling in. Last week's positive employment and retail data put pressure on gold, but every time there was a pullback buyers came into lift the offer, holding support at $730/oz.

Despite gold's rally today, Silver was down, failing to break resistance at $14.100/oz. Of course, gold is the go-to inflation hedge, and gold probably has better fundamentals than silver. But silver's relative under-performance is disappointing because the last time serious money poured into precious metals (early 2006), silver led the charge (shown below). The silver-to-gold ratio has waned during the past year as both metals consolidated, but the ratio may be ready for a flip as increasing capital flows into the much smaller silver market may have a greater positive effect on silver prices than on gold prices.

The other side of the argument (gold is better than silver) presents pretty convincing empirical evidence, showing that silver outperforms gold when there is confidence in financial assets. This seems relevant right now, as risk appetite in financial assets is still sensitive to ongoing housing market deterioration and future fed rate decisions. If silver is going to prove itself more worthy, now is the time to do it.

[Silver:Gold]

Yen, Gold, and Silver Technical Alert

2007-10-04T00:49:00.000-04:00

The Dollar has rallied back against the yen amidst today's positive ISM non-manufacturing data, which beat expectations (discussed in previous post). But stocks retreated as more banks came out with bad news. It probably makes sense for banks to finally disclose some problems and admit mistakes now that the stock market has rallied back to pre-August subprime panic levels. At least the liquidity situation seems to have recovered, and risk appetite might be growing again. This is evident in the reemergence of the yen carry trade on the backdrop of the yen's big long-term technical breakdown following a bearish triangular formation (shown below). With Japan pumping as much money into the economy as the US, a yen sell off to 118 in the short term may be possible. More positive employment data this Friday will trigger another yen sell off.

[Yen futures: One-Year Chart]

Gold and Silver have rallied hard since 9/18 (rate cut), but they are now back to 9/18 support levels amidst a crude sell off and a dollar rally (fueled by stock rally and positive economic data). A break below these support levels will be bearish, and gold may drop to $715/oz while silver may drop to $12.8/oz. Negative employment data this week will help gold and silver hold its support, as it will reinforce a rate cut at the end of this month.

[Gold futures: One-Month Chart]

[Silver futures: One-Month Chart]

Bonds: battle at resistance

2007-10-02T22:09:00.000-04:00

Note the well defined RSI divergence since last week (shown below). I mentioned in the previous post that bonds were at resistance, but after a sharp sell-off, bonds rallied through one more box to reach a more long-term resistance level (also the center of the huge doji formed on 9/18 when Bernanke cut rates). Today's negative housing data helped the bond rally, reminding people that the worst in the housing market is far from over (DUH!). Although today's housing data was worse than the market's forecast, I don't think we will see spillover effects in the broader economy until end of this year or next year; it takes time to cut back on spending and layoff employees. Looking back to last week's economic data releases, jobless claims dropped, GDP remained unchanged, and ISM also remained unchanged. Therefore, this week's ISM non-manufacturing, jobless claims, and employment data are most likely to remain unchanged or even beat expectations. Short bonds.

[Bond futures: one-month chart]

Long Bonds at Resistance

2007-09-28T09:18:00.000-04:00

30-yr Bond futures have climbed back amidst negative economic data indicating that the Fed will cut rates again this year. Moreover, the Fed announced this morning that its inflation measure matches forecasts, pushing bonds higher. But with silver, gold, and crude oil beating historical highs with never before seen prices, inflation seems far from under control, and I think the rally in long bonds is overdone. Inflation expectations and potential record highs in the stock market should send the 30-yr below 110 in the coming weeks.

[Bond futures: one-month chart]

Steepening YCRV

2007-09-25T11:36:00.000-04:00

Bond prices have climbed back since last week, and this morning's negative economic data (existing home sales, consumer confidence) releases provided a bullish case as a safe haven. But sellers stepped in during the afternoon, erasing the day's gains. It seems that today's negative economic data gave support to Bernanke's rate cute decision, and made further rate cuts this year seem more likely. This only means that there will be more inflation created to sustain the housing problem, which is far from over. The market seems to be more concerned about inflation, downplaying bond's role as a safe haven. It will be interesting to see how long bonds react to this week's economic data releases (durable goods, GDP, new home sales etc.) which will most likely turn out to be negative.

No hurricane, but technically bullish

2007-09-24T17:12:00.000-04:00

Here is a chart of NOV07 natural gas which became the front month K today. There seems to be a potential inverse head and shoulders formation, indicating a bottoming. Moreover, relative strength has been increasing steadily while natural gas made multi-year lows. A rough hurricane season and colder than expected winter can also facilitate a move through $8 to test the $9 level.

Hurricane coin toss

2007-09-20T21:45:00.000-04:00

Since falling from $8.5, natural gas has been trying to find a bottom (low: $5.25). Natural gas has recently formed what seems to be an inverse head and shoulders pattern (not shown here), with a very pronounced support/resistance at $6, as shown below (also the right shoulder of the pattern). I have missed a couple opportunities to play the natty roulette at $6, and it looks like I finally have a chance.

Making things more interesting is a potential hurricane development in the Gulf of Mexico, and whether this system develops into a serious threat depends on which course it takes, as shown below. The strength of the potential hurricane is directly correlated to how long the system hovers over the currently warm sea waters. I'm betting that the system will float west and develop into a hurricane significant enough to nudge natural gas prices higher. Although natural gas is heavily weather/inventory driven, it has not really participated in the broad inflationary rally in commodities, and it will be interesting to see how it performs in the coming weeks.

Fear of inflation

2007-09-20T18:55:00.000-04:00

Today was an exciting day. Silver made a a very strong run to finish at roughly $13.6/oz, but the most exciting move came from bonds; just compare the chart below to yesterday's chart.

The day after B-52 Bernanke...

2007-09-19T13:17:00.000-04:00

Well Bernanke showered upon us a chunky 50 BP cut, and the markets responded swiftly. After a brief volatile gyration, gold, silver and FX began making strong gains. Gold is at record high's (you'd have to look back many years to match today's high), but because silver is still shy of May 2006 high's, it is easier to estimate resistance levels. Since last year, I incorporated a concept called "Box Theory", and looking at the silver chart below, once could detect a roughly $0.400/oz box range. Today silver is at the top of a box (yesterday's high), and it is a matter of time before we see a trend of boxes on top of another.

Considering that Bernanke has just unleashed significant inflation upon the markets, as shown in record commodities and FX prices, we are bearish long term bonds. Bonds have rallied significantly since August, and a bearish triangular formation has formed over the past couple of weeks; most likely just in time for a sell-off in fear of unexpectedly higher inflation.

Much needed crack, I mean cash

2007-09-18T13:26:00.000-04:00

I am back from a very long break (working as a summer associate at Linklaters, structuring CDO's that people won't see again for a long time, moving out of dirty Brooklyn and moving into pretentious Soho, traveling to a paradise island in Thailand etc.) By the way, what better day to recommence trading than today's Bernanke festival? The market has been addicted to easy credit for the past 5 years, and today Bernanke must give the market its much needed fix.

Today is the big day everyone has been waiting for: B-52 Bernanke (a la Puplava) is about to unleash piles of cash over the markets. When the subprime/credit crisis really began to reveal itself in August, most people had no doubt that the Fed would slash the fed funds rate by at least 50 basis points. Since then, the Fed has undergone a massive reinflation campaign by lowering its discount rate and exchanging almost any piece of crap for cash, thus providing much needed liquidity into the financial system. By doing so, the Fed has technically already lowered the fed funds rate by 25 basis points and injected inflation into the markets. In recent weeks, we saw gold make new highs, silver make a strong comeback, and crude reach a record high. This trend became more pronounced when precious metals began moving independent of stock performance in the past few weeks.

With inflation indicators at record highs, many people recently became wary of whether the “academic and inflation fighting?” Bernanke would indeed cut 50 basis points. But we’re talking about B-52 Bernanke here, and he is certainly not an inflation fighter. The central bank is constantly on a PR campaign to establish itself as an inflation fighter, but in reality, the central bank is the sole creator of inflation and the market depends on it more than ever. Recent fear of an "excessive" rate cut will actually provide the Fed today with room to make a 50 BP cut and beat market expectations.

So what should one buy and sell? Obviously, we are very bullish on gold and silver. Unfortunately, silver has been lagging behind gold (silver is still $2 shy of its 2006 high), and some are doubting the performance of silver, citing reasons like decreasing industrial demand. But watch out for silver, as I will begin following silver very closely.

Feels great to be writing again!!!

Fresh Start

2007-05-20T14:36:00.000-04:00

I am planning a new start/structure to the market commentary. The past couple months have been very busy, and I did not even make a single trade (doesn't mean my mind's been away from the markets). Since the last commentary, stocks have made new highs, but commodities have gone nowhere (except for crude) - hopefully we'll see more volatility soon. Please stay put for the new Prudent Observer!