Economy

Real gross domestic product (GDP) increased 1.3 percent in the first quarter of 2007 after increasing 2.5 percent in the fourth quarter of 2006, according to estimates released by the Bureau of Economic Analysis.

The supposed culprit was the sagging housing market. Existing home sales for March fell 8.4% from February.

The Commerce Department also reported that new-home sales increased 2.6% following a 4.2% drop in February.

Home construction fell 17% (annualized) last quarter, after contracting by 19.8% the prior quarter.

Inflation, as measured by prices for domestic purchases, increased 3.6 percent in the first quarter.

Energy prices turned up, after dropping sharply in the fourth quarter of 2006. Excluding food and energy, prices increased 2.8 percent.

Real disposable personal income increased 4.5 percent.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.6 percent in the first quarter.

Excluding food and energy prices, the price index for gross domestic purchases increased 2.8 percent in the first quarter, versus an increase of 2.4 percent in the fourth.

Real personal consumption expenditures increased 3.8 percent in the first quarter. 

Durable goods increased 7.3 percent. Non-durable goods increased 2.9 percent.

Services expenditures increased 3.7 percent, compared with a prior increase of 3.4 percent.

Real exports of goods and services decreased 1.2 percent in the first quarter. Real imports of goods and services increased 2.3 percent.

The trade deficit widened to an annual rate of $597.8 billion from $582.6 billion in the fourth quarter.

Consumer prices excluding food and energy rose 2.5% in the first quarter ending in March. Overall prices were up 2.8%.

The Reuters/University of Michigan final index of sentiment declined to 87.1 this month from 88.4 in March.

The Bureau of Labor Statistics of the U.S. Department of Labor reported that total compensation costs for civilian workers increased 0.8 percent from December 2006 to March 2007, including seasonal adjustments.

Wages and salaries rose 1.1 percent for the three-month period, compared with 0.7 percent for the previous period.

The Land of Subprime

Things are progressing along in the land that subprime forgot – to check on before giving out mortgages to unqualified buyers to turn a quick dime. The lure of easy money has hooked many – and will hook many more to come. It hooks much harder then it looks.

Bloomberg Reports:

“Credit Suisse Group was sued by a Florida insurer that says it lost money on investment-grade bonds backed by subprime mortgages sold by the bank.

The suit, filed in Florida by Bankers Life Insurance Co., is ``one of three to five in the pipeline'' involving securitizations by Credit Suisse, Switzerland's second-largest bank, said Dale Ledbetter of Ledbetter & Associates P.A., one of two law firms representing the Bankers Financial Corp. unit.

We suspect that once people understand what occurred here, there's going to be a lot more,'' Ledbetter said. A total of $302.6 million of bonds were originally issued in the deal.

Bankers Life, based in St. Petersburg, is seeking to recover about $1.3 million to make up for losses of principal, interest and market value on about $1.4 million of the 2001 bonds it bought in 2004, Ledbetter said. Other investors considering suits will probably seek between $500,000 and $3 million each, he said.”

JAPAN

Central bank Governor Toshihiko Fukui held the key overnight lending rate at 0.5 percent for a third consecutive meeting. The BOJ met this past week and did nothing as was expected.

Rates were not raised and the likelihood of an increase any time in the near future is remote, regardless of what Mr. Fukui says:

“If markets expect the BOJ to keep rates low even while the economy achieves 2.1 percent growth (as forecast by the BOJ), it could distort the BOJ's policy scenario... We need to adjust interest rates despite near-term weak price growth, if we can confirm that long-term price moves are strong and the economy and prices are heading towards a good direction.”

Japan’s Conundrum

Fed Foreign Holdings of Treasury Debt gained $2.1 billion last week to a record $1.91 trillion. Custodial holdings were up $314 billion the past year or just under 20%.

International reserve assets, excluding gold, were up $436 billion to a record $5.24 trillion, and even more incredibly they increased at an annualized rate of 28%.

China’s foreign reserves are now over $US 1.2 Trillion, as of the end of March.

Japan has the world's second largest reserves - $US 909 Billion as of the end of March.

As of March 31, Japan’s national debt was $US 6.7 TRILLION. The annual interest expense totaled $US 177 Billion. This works out to a 2.64% interest rate on their debt.

This is why Japan keeps interest rates so low. If they raise rates they will destroy the value of the huge holdings of their Government Bonds. If Japan’s rates were to equal US rates their interest payments would double to $355 trillion.

Couple this with the fact that China and Japan buy almost half of the US government debt market and you can see why Japan never gets rebuked at the G7 meetings for such inordinately low interest rates. It is a fait accompli that is coming to the US very soon as well.

Recently the Fed has been buying 20% of the U.S. Treasury Debt – not a good sign. If they have to buy more because foreign borrowers shy away – it will cause inflation and rising interest rates.

If the US consumer starts slowing down in purchasing stuff from overseas (Japan & China) then they (China & Japan) will have fewer dollars with which to buy our Treasury Debt. This means the Fed will have to step up to the plate and buy more – causing further inflation.

Now this is the scenario if foreigners decide to buy less of our debt. What if they decided to start selling our debt that they presently own? 

Interest rates would rise as bond prices fall. The Fed would have to monetize everything in site. The US Dollar would fall in value. It could get quite nasty considering the level the dollar is at presently. Just a thought.

They are walking a fine line – razor sharp – a precipice. We wish them luck.

Gold

Gold was down $14.00 for the week closing at $681.80 (-2.01%). Its intraday high for the week was $697.70 and its intraday low was $673.80. It was gold’s lowest close in the last three weeks.

In last week’s market wrap we stated:

Gold was up $5.90 for the week, closing at $695.80 and within spitting distance of its 25+ year high. It closed above its February high this week, but has yet to test or surpass the May 2006 high near $722.

The daily chart of gold below shows it just peaking above its upper trend line. Notice the negative divergence on the chart per the RSI indicator and the MACD indicator. 

The POG needs to do some work to turn these indicators up. 

As the daily gold chart below shows, the negative divergences have not been resolved – the negative price action for the week actually was the result of the negative divergences beginning to play themselves out.

Does this mean the corrective action is over? No, not necessarily, however, the downside parameters are lessening.

Note on the chart that the price action made new highs, but the RSI only made equal highs, while the MACD made a lower high AND a made a negative cross over.

These were warning flags that further corrective action was probably forthcoming, and as we saw for the week – it was and it did.

Next we have the weekly gold chart. RSI is just beginning to roll over. The MACD indicator is still positive and the histograms are still positive.

The POG can be seen bumping off its upper trend line (resistance), yet well inside its symmetrical triangle and above its bottom trend line (support).

$650.00 represents significant support. The 65 week moving average ($614.03) has only been breached once during the entire bull market and has acted as ultimate support numerous times.

It has always been the best buy because it’s the hardest buy – the hard trade is usually the best trade. Easy trades are like easy money – ephemeral – now you see it, now you don’t.

Silver

Silver has been acting weaker than gold as of late. It did not better its March high as did gold. It has bounced off its vertical overhead resistance and broken below its 50 day moving average.

As we remarked last week – several of the silver stocks are still among the best performing precious metal stocks, which seems to allude that buyers see positive future price action for silver. We would agree – the question is as always – when?

Hui/Gold Ratio

Next up is the hui/gold ratio, which shows that gold is presently out performing the gold stocks. This ratio needs to turn up in favor of the gold stocks to indicate the strongest price action for the overall pm markets.

The strongest bull markets are when the gold stocks are out performing gold; as gold is still performing strongly or the gold stocks would not be going up. But the stocks are leveraged compared to the physical and should act accordingly.

Hui Index

The Hui was down 11.33 points to close the week out at 344.83

(-3.18%). Its intraday low for the week was 341.28 and its intraday high was 358.51. It was the Hui’s lowest close in 4 weeks.

In last week’s market wrap we stated:

Up first is the daily chart of the Hui Index. For the week the Hui was down 8.31 points to close at 356.15 (-2.28%). As the chart below shows, there are several negative indicators flashing, which need to be turned up into positive territory before a sustainable rally up is possible.

Once again the Hui broke above resistance only to close down back below it. We mentioned that this was quite possible in last week’s report. RSI shows negative divergence, as well as turning down sharply; however, it was entering overbought territory.

MACD shows a negative divergence with a negative cross over looming as a distinct possibility. These indicators all need some work to turn them up and positive.

As the daily chart of the Hui below shows, the negative divergences played out in further downside action, and the looming negative MACD Cross over did occur.

The good news is that the stochastic indicator is entering oversold territory.

Next up is another daily chart of the Hui that shows a different view. Notice the upper and lower parameters of the Bollinger Bands.

The lower level is at 338.53 and has provided support (lower band) during numerous previous corrections.

So, what do we need to turn the Hui Index around and back up into its next phase of the gold bull?

The daily chart below shows the first three steps that are needed.

1. A positive MACD Cross over needs to occur with the histograms turning up as well.

2. The vertical resistance per the blue line needs to be broken above and sustained with a weekly close and further positive price action/confirmation.

3. The Hui/Gold Ratio needs to break above its upper trend line resistance level showing that the gold stocks are out performing physical gold.  

Next up is the GDX daily chart that shows similar price action to the Hui.

It peaked above its upper trend line (resistance) only to close down back below; however, it is well above its lower trend line (support). It presently is testing its 50 day moving average.

RSI has turned down and a negative MACD Cross has occurred.

In last week’s market wrap we stated:

Also, many of the charts show divergences and negative cross overs, which need to be repaired and turned up.

Most players in the precious metals sector are looking for the next leg up to be commencing, which very well may be occurring.

However, we will go with discretion being the better part of valor.

As fortune would have it – such was the case to be, as the above charts have shown. Below is the weekly chart of the Hui.

Next a weekly chart that shows the Hui well within its rising bull channel.

The chart proceeds from the lower left hand corner to the upper right hand corner. A pretty picture if one is aligned with the trend.

Note the 65 day moving average that has provided ultimate support all during the bull market since 2001.

It’s not a guarantee – but its a pretty good bet. In the end you’ve gotta lay your money down and you take your chances.  

The monthly chart below still shows many divergences that need to be corrected and turned around and up.

Summary

A sea of liquidity has inundated the world and is raising most boats. The U.S. has been the main culprit in the creation of vast amounts of credit, but Japan and others have contributed greatly as well.

When will the tide go out – exposing the shallow sand bars to the light of the sun? It’s always a question about timing, as one can be right too early or too late. 

One hint that something is up is the recent subprime loan debacle. It will get worse before it gets better.

Look for further bankruptcies. Look for the major lenders to start laying off workers – that will be a big warning.

Interest rates have started to rise – not just on the short end but on the long end of the yield curve as well. If rates rise much further the already weakened housing market will feel the pain, and the economy along with it.

Watch interest rates and the bond market in Japan. Their bond market generally leads ours in their direction. If interest rates begin to rise in Japan and bond values fall – expect the same to visit our shores not long thereafter.

The dollar is in a nasty decline, but we think it may have a respite coming before it really breaks down. Watch the previous lows marked on the chart.

Oil has had a very good run – it is difficult to tell if more is to come shortly or if a top is forming.

Then the question remains: would it be a short term top that leads to higher lows and higher highs, and an intermediate term trend change to the bullish side; or would it be an intermediate term top with a resumption of the bearish correction down, with lower lows and lower highs?

Overall commodities are doing just fine. Look for the excess reserves held by China to go into things that when you drop them on your foot it hurts. China will buy strategic commodity reserves and whatever facilities/infrastructure is needed to accomplish such.

Gold and the gold stocks are still in correction mode. They have NOT broken out into phase two of the gold bull market. The best is yet to come.

The various divergences shown on the charts suggest further downside action may be coming; however, the lower parameters are steadily decreasing. Look for support zones as marked on the charts.

We plan to accumulate further gold and silver stock positions on weakness that holds above support. We will do so cautiously and incrementally.

If the opportunity presents itself, and the set-up suggest that the high is being tested without an immediate sustainable break out above – we will take profits accordingly.

Suncor is an interesting play on a pullback, as is XNG (American NG Index), EP (El Paso Corp. - gas), WB (Williams – gas), NFG (Natural Fuel Gas).

We would like to mention that a truly honest man is running for President – Congressman Ron Paul from Texas. Congressman Ron Paul does not kiss up to the powers that be. He tells it like it is.

We invite you to check out his message. We believe it is one worth supporting and voting for. Congressman Ron Paul (click on link).

Honest Men know the importance of Honest Money and a foreign policy that does not attempt to conquer the world – thus allowing the focus of government to be on protecting the unalienable rights of its citizens according to the mandate of the Constitution of the United States of America.

This

Or

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.

Douglas V. Gnazzo

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Honest Money Gold & Silver Report

About: Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

-- Posted Monday, 30 April 2007 | Digg This Article