Sunday, September 21, 2008

The Dow is Crashing

The stock and commodities markets obviously experienced a tremendous amount of volatility for this past week. However, what may not seem as obvious is the amount of government intervention/manipulation that went on behind the scenes.

With markets in free fall this week, central banks injected an unfathomable amount of liquidity into the markets. When money is injected into circulation, it is not withdrawn from some sort of reserve (the Federal Reserve does not have any reserves -and is not federal), but is created out of thin air.

One sure way of detecting this type of activity is through monitoring of the price of gold. The amount of gold in circulation is relatively constant, so when the amount of paper dollars in circulation expands, there are more pieces of paper chasing a finite amount of gold, so the price of gold rises.

The past week saw one of the sharpest rallies in gold ever. Therefore, it can only be reasoned that the amount of liquidity dumped into circulation was also one of the largest ever. This increase in liquidity waters down the purchasing power of the US Dollar.

What is interesting is when one looks at how the Dow Industrials performed this week when priced in real money, such as gold, rather than in paper currency. In currency terms, the Dow was only down slightly for the week, but in real money, the Dow has lost a tremendous amount of its purchasing power, due to the fact the the Dow is denominated in dollars that are being watered down:

The markets did rally on Friday, but, in my opinion, this was not due to any change in the fundamentals, but due to changes in regulations socialistically put in place by governments. Not being allowed to short sell banks will not solve anything longer term.

Anyway, now, more than ever, I feel bullish on gold and silver. Here is a long-term chart of the status of this great bull market:

The above chart is a monthly chart of gold, and goes back about 23 years. In my view, the chart shows that we are in a very strong bull market, which, like any trend, is more likely to continue at this point in time than to turn around.

This chart does not necessarily suggest that gold will rise or fall next week or next month. In fact, I have no idea what will happen next week or next month. I feel that it is a more profitable methodology to follow trends rather than try to predict them.

Over the past several several years, I have debated whether if it is more profitable to try to predict trends or simply follow them. This blog has endeavored to try to predict trends, whereas my other blog discusses the wisdom of simply following them.

Through an unbelievable amount of study, I am now fully convinced that the strategy of simply following trends is the superior methodology. As such, I will likely dedicate more effort and time to my other blog from here on in.

Sunday, September 14, 2008

Gold Stocks, US Dollar, and Crude Oil Charts

The above chart is a weekly chart of the XAU gold stocks index. I have said in several previous posts that gold stocks needed to hold the support area outlined above for me to remain bullish on the sector.

During this past week, it appeared that the gold bulls had capitulated, and the bears would close gold stocks well below support. However, towards the end of the week, the bulls miraculously drove the price back above key support, creating the longest lower shadow I have ever seen for the XAU.

In my view this is extremely bullish action, and now, at long last, I am willing to declare that we have likely put in a bottom for gold, and gold stocks.

The next chart is a monthly chart of the US Dollar Index:

When is comes to the USDX, 80 has always been a key support area going back decades. The USD broke support at 80 last year, and plummeted thereafter. Currently the dollar is re-testing this broken support area, which is now resistance. I feel that the USD will likely fail at this level, and head lower, adding more fuel to the gold and silver rebound.

Another development that has occurred that gives me optimism is that crude oil has gone through a healthy correction, and is testing a key level of support as well:

Crude oil is trading within a hair of $100 per barrel, and this number is psychologically significant. This is also the level where crude experienced a breakout, which I mentioned in this post.

I still generally do not recommend trying to pick tops and bottoms, and still feel that trading with the trend is a more profitable methodology. But if you are into picking bottoms, this may be just as good a time as any.

Saturday, September 13, 2008

Manipulation in the Silver Market

Another topic I wanted to bring up was silver and the notion that there is a manipulation in the futures market. I have read and listened to many experts, such as Bill Murphy, who have always stated that the gold and silver markets are manipulated. I felt that this could be true, but at the same time also felt skeptical. However, after witnessing what has happened over the last month with regard to silver prices, I know without question that silver does not operate under a free market.

One way that I became aware of this chicanery was through the realization that, over the past month, every coin shop I went to was completely sold out of silver, which previously was something that I rarely experienced.

A basic understanding of how the law of supply and demand operates will tell you that if a price of a good or service is held artificially low, shortages will appear, as supply and demand are mismatched.

Another interesting development occurs when there is artificial price controls or manipulation in free markets, and that is a black market tends to occur. In a black market, a buyer and seller, through the forces of supply and demand, will reach a price for a good or service that is quite different from the manipulated price.

This is in fact what is happening in the physical market for silver at this time. The price of paper silver, which is traded on the futures exchange, is becoming divorced from the price of physical silver. If you want evidence of this, check out the random Ebay auctions outlined below, and you will see what the real value of silver is.

In this blog I have always advocated physical silver over paper silver, such as ETFs. Because, as I said in the comments in this post, having physical silver is money, and everything else is just paper.

1) 5 ounce NWT bar:
$81.00 plus 15.95 shipping = $19.39 an ounce

2) 30 Canadian 80% silver fifty cent pieces (contains 9 ounces)
$158.49 plus $7.50 shipping x 1.06 exchange rate = $19.56 an ounce

3) 10 ounce JM bar:
$170.00 plus $10.00 shipping x1.06 exchange rate = $19.08 an ounce

4) 20 silver eagles
$345 plus $20.00 shipping x 1.06 exchange rate = $19.34 an ounce

Gold analysis will follow tomorrow.

Saturday, September 6, 2008

Gold, Euro, Natural Gas Analysis

The above chart is a weekly chart of GDX. Despite another round of declining prices, gold stocks are still holing this important support area. In my opinion, this level of support is key, and if it is taken out, I will have a difficult time remaining bullish on the sector.

On the other hand, the Euro has broken down badly, and is no longer in a weekly uptrend:

The fact that the Euro has broken down is certainly not an asset to the gold bulls, but it is not necessarily a liability. It is still possible for gold to rally in a falling Euro environment:

Another commodity that caught my eye this week was natural gas. Natural gas prices have collapsed, as this weekly chart shows:

As you can observe in the above chart, natural gas is at a potential level of support, and has formed a bullish candle. Personally, I would not buy this ETF for my trading account, as it would violate my trend trading criteria. However, adding this ETF into a long-term trading account (more than 5 years), such as an RRSP, could be wise.

For my trading account, I was blown out of the positions I mentioned last week. The long positions struggled in the face of the TSX's 1,000 point correction. Whipsaws will always be apart of trend trading, and the only way to avoid them is to stop trading.

As part of my method of managing risk, I always try to go long and short different stocks so that if there is a severe correction, I will be partially protected. Here are some of the positions I took this week and continue to hold: