-- Posted Monday, 16 April 2007 | Digg This Article

Honest Money Gold & Silver Report

Economy

The Reuters/University of Michigan's preliminary index of sentiment declined to an eight-month low of 85.3 in April from 88.4 a month earlier.

Producer prices increased 1% in March. The core rate remained unchanged. The U.S. Trade deficit narrowed to 0.7% in February.

Producer Prices were up 3.2% year over year.  March Import Prices were up 2.8% year over year. March’s Fiscal Deficit jumped 12.9% to $96.27 billion. 

The G7 meet this weekend to determine the course of world affairs. Let’s hope they get it right, as it is quite a bit of responsibility to lay on a group of just seven men, but alas that’s how it’s done. They are sort of a counsel of Elders, if you will. And who is El?

China's Foreign Ministry confirmed that the nation's top officials from the People's Bank of China and the Ministry of Finance will not attend the G7 meeting in Washington.

China is one nation not overly thrilled or impressed by the elite get together, as China’s Foreign Ministry official said that:

"As far as I know, the finance ministry and central bank have full schedules for their principal officials lately so they are not able to attend that meeting."

Perhaps they are dismayed by the President’s recent negative report on China to the World Trade Organization. It is a thing of beauty to watch diplomats at work.

International Monetary and Financial Committee

The Fed released the minutes from their last meeting, which contained the following:

`”The combination of generally weaker-than-expected economic indicators and uncomfortably high readings on inflation suggested increased downside risks to economic growth and greater uncertainty that the expected gradual decline in core inflation would materialize.”

“Further policy firming might prove necessary to foster lower inflation,” the Fed added.

The minutes went on to say, “But in light of the increased uncertainty about the outlook for both growth and inflation, the committee also agreed that the statement should no longer cite only the possibility of further firming.”

Federal Reserve Bank of Dallas President Richard Fisher had some interesting comments in a statement he issued last week:

“Globalization raises the economy's speed limit, allowing policy makers to relax and let the economy expand at rates that might once have been considered unsustainable. Getting more output from existing labor and capital allows the economy to grow faster without igniting price pressures. In a globalized world, faster growth need not carry the same inflationary implications it does in a closed world.”

I have no idea as to why, but it struck me as odd that the word debt was never used in either statement; after all it is the largest growing sector of the world economy.

You would think it would get a little mention out of respect alone, but perhaps respect is absence in the abode of greed. I mean where is all the money coming from to pay for all this stuff? Maybe now it is different – maybe now you don’t have to pay for stuff.

Politics

The following four items seemed worthy of mentioning. All are concerned with the war in Iraq. As the picture below shows, there are a few less than enthusiastic supporters of the U.S. occupation of Iraqi.

Democratic Senator James Webb accused Republican John McCain of questioning the patriotism of those who disagree with him on Iraq and ``hiding behind the troops as political justification'' for a misguided policy. I know that I wasn’t too thrilled with his endorsement of the Military Commission Act of 2006 that threw habeas corpus out the window.

Administration officials will advise President George W. Bush to veto legislation requiring him to provide lawmakers with details of the CIA's secret prisons for terrorism suspects, a White House statement said. This too was in the above sited Act of 2006.

Followers of radical anti-US cleric Muqtada al-Sadr march through

the holy city of Najaf, Iraq, Monday, April 9, 2007, on the fourth anniversary

of the fall of Baghdad to the US forces.

Congressional Democratic leaders agreed to meet with President George W. Bush next week to discuss their differences over an emergency spending measure to fund the war in Iraq that sets a timetable for troop withdrawals.

Defense Secretary Robert Gates said U.S. Army units would be deployed to Iraq for 15 months instead of 12 months, effective immediately.

Gold & Silver

The first chart up is the Hui Index with the price action of physical gold overlaid on top of it. As can be seen the two follow one another fairly closely.

There have been times in the past where the two have not traveled in the same direction, or at least in the same time frame; and there will be times in the future when they do not track one another.

Next is the chart of the Hui compared to Gold. The chart shows that since March the trend has been up and in favor of the gold stocks over the physical metal. This is viewed as a constructive indicator for the overall precious metals complex.

Next is the Hui Index by itself. The chart shows that horizontal resistance at around 360 has been broken above, with the index closing at 364.47. This is a very positive occurrence, especially if the break holds.

As of now we are not calling it a break out – but a break. We want to see the follow through with a two day close above this level, and prefer a weekly close above as well.

When this level acts as support, as opposed to resistance, we will be convinced and undaunted, and will act accordingly. Until then we wait and watch.

We also note that the gold stocks have been up for eight days – a bit long in the tooth as they say.

We hold large positions in the gold and silver stocks and will be happy if they go up from here. If they go down – we will use the cash raised in taking earlier profits to re-deploy at lower prices.

We still retain a large chunk that has not as of yet been committed to the precious metals market.

Either way we are satisfied.  The best is yet to come. Patience and fortitude will be rewarded accordingly.

Below is daily chart of silver. Silver has not been as strong as gold lately. The chart shows that silver has not yet broken above its overhead resistance line.

Next up is a monthly chart of gold. The chart shows the very nice bull run, as the chart goes from the bottom left hand corner to the top right hand corner. However, there are some indicators to be concerned with.

RSI has been overbought for about a year now. MACD is flat and could be headed for a negative cross over – that is the main concern. The stochastic reading shows a negative divergence as well. Caution is warranted.

Following the monthly chart of gold is the weekly chart, which paints a bit of a different picture. The weekly chart shows that all major corrections have started from RSI readings of 70+. As the chart shows, we are not even close. Also note the 65 week moving average that has worked like a charm for timing buys.

Below is the weekly chart of the Hui Index. As the weekly chart of gold showed, all significant corrections have come with RSI readings of 70+. We are not yet close.

Notice how the corrections all line up with the elevated MACD readings as well. The 65 week moving average – once again – works like a charm.

Next is the monthly chart of the Hui Index. It shows a negative MACD cross over has already taken place – which needs to be resolved to the upside – soon. Histograms have turned negative.

However, the monthly charts develop from out of the weekly, and the weekly develop out of the daily. But this is an ongoing cycle of cycles with many variables that do not always work out the same each time. There are overlaps and intersections – divergences and convergences.

We cautiously watch the daily and weekly charts to see how they develop from here. Is the monthly giving a sage warning or will it correct to the upside? If it does, it will be in very over bought territory.

Summary

So far the world stock markets have held together after the “China” fall. It is fascinating that China’s Market (where the domino-like fall began) has not only held together, but has gone on to substantial new all time record highs.

In our opinion it is an asset bubble waiting for a time and place to pop. Will it go higher? It very well may. If it does, it will do so without us aboard. And we will have NO regrets.

The subprime loan problem appears to have quieted down for the moment. There are still huge amounts of these loans out there. If interest rates go up they may trigger more defaults due to adjustable rate mortgages.

Also, many of the loans have not yet adjusted to the present rise in rates, as they are still in their initial lower “teaser zone rates”. Once the “honeymoon” is over and they adjust upwards there could be more problems as well. 

Bond yields are no longer inverted. For a few weeks there was a positive slope to the yield curve. Now the yield curve is flat. Any surprises in rates will, in our opinion, be to the upside.

Although interest rates have gone up – the dollar has continued to go down. Generally rising interest rates are positive for a currency. So far such has not been the case for the dollar. The chart does, however, show some positive divergences. Long term the dollar is burnt toast, which gold has picked up the scent of long ago.

Commodities when viewed through the correct perspective (CCI non-weighted index) shows that things that hurt when you drop them on your toes have been a good sector to be invested in. Perhaps it is because they are REAL things – stuff. The realist of the real is gold – the asset that is no one’s obligation.

The gold stocks have broken above horizontal resistance. We are not yet calling it a break out, which it very well may be. We are waiting for at least a two day close above the break and preferably a weekly close. An even stronger indicator will be when previous resistance holds as support.

We do note, however, that this level has been under attack for some time now and repelled on a few different occasions. Such does not represent weakness but strength.

Every new assault wears away more and more of the overhead resistance or supply. Stocks leave weak hands and enter strong hands. When the break out finally occurs it should be quite strong once it gets going.

However, there are the monthly charts of both Gold and the Hui that indicate caution is warranted. The monthly charts do come out of the weekly, which in turn come out of the daily. This favors that the monthly charts will be resolved by the weekly and daily price action; which yet remains to be seen how it develops from here.

There is, however, no guarantee that this will occur, and even if it does the monthly chart will be very overbought. The signals are mixed. Guarded optimism seems prudent. Forewarned is forearmed – even if never needed or used. 

The G7 are meeting this weekend – planning the course of the world. Hopefully they will make some good decisions. The picture below sums it up quite well.

Invitation

Stop by our website and check out the complete market wrap, which covers most major markets. There is also a lot of information on gold and silver, not only from an investment point of view, but also from its position as being the mandated monetary system of our Constitution - Silver and Gold Coins as in Honest Weights and Measures.

There is also a live bulletin board where you can discuss the markets with people from around the world and many other resources too numerous to list. Drop by and check it out. Good luck. Good trading. Good health. And that's a wrap.

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And read the Open Letter to Congress

© 2006 Douglas V. Gnazzo

COMING SOON: A REQUEST FOR AN AUDIT OF US GOLD RESERVES

-- Posted Monday, 16 April 2007 | Digg This Article

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