10-23-2008
Everything Capitulates
At this particular point in time it matters little where you put your money or investments since practically anything other than investing in a “short selling” product has produced a negative return. Stock Indices, Energy Markets, Bond, Notes and commodities in general are all in a free fall of sorts.
There is a change taking place. I do not see panic liquidation as there was over the past 3 or so weeks. The Libor Rate is falling and there is a belief that Government actions are slowing working through the system to make the financial markets become more liquid. No, the problem is not solved. That can be seen by the decline in practically everything. However, it’s important to look past the trees to the forest and realize that the credit problems are being addressed.
As the front tier financial institutions have gone out of business, been battered or severely bruised, those left standing are with the help of their respective Governments, rebuilding their balance sheets. Eventually banks will get back to their primary business; that of lending. Lending standards will be different this time around, with more conservative guidelines in place. The days of wheeling and dealing with bankers is over for the foreseeable future.
In most areas of the world, real estate continues in a state of decline. Since real estate issues were at the root of the financial crisis, until real estate stabilizes pressure on credit and financial markets will continue. The question is the pace of the continuance. The good news is that housing starts here in the US are sharply down. This means that when funds free up, existing inventory should move first as there won’t be a lot of new homes under construction competing against “older” existing homes. After enough product moves, new homes will begin to be built. This does not mean that some new projects around the country are not underway. They are, but in small pockets, in certain areas meeting certain demands. Where I live in Chicago, I am constantly amazed to see new ground breaking for new high rises. In other parts of the city, buildings like the Trump Tower are having difficulty selling units. It remains a difficult time.
Recession
We are in a recession.
Whether or not Chairman Bernanke uses the Recession word or not is immaterial to me and probably to you. The US Economy is spiraling downward. Restaurants, auto sales, clothing stores, electronics and the like are losing customers and all are bracing for the worst.
Third quarter earning reports from public traded companies are in general calling for fourth quarter guidance, which is another way of saying to look for lower sales and profitability. If I were CFO of a public company, I would take an ultra conservative approach and lower expectations given the severe decline in the stock market. There is no penalty in doing so since almost everything is under attack. If in the first quarter of next year expectations are exceeded, the environment at that time might be very rewarding.
Getting back to the metal markets, an acceleration of price declines is taking place now. Soon, very soon, you will begin to hear about production cutbacks as the cost of production and lack of demand will convergence to reduce mining output. This makes sense and is something that you should expect to start reading about in the near future.
Deflation versus Inflation
Last week I wrote that Deflation is the theme of the day….in all commodities.
OPEC is about to convene to figure out a way to curtail production. Farmers have to figure out now what to plant in South America and how to pay for it. Fertilizer orders in South America are already sharply down, which should reduce yields.
Copper is down to $1.71 a pound which I guess means that traffic lights are now safe, as vandals discover that the scrap price of copper wiring not worth the risk of getting arrested.
Silver is down to prices last seen in 2005. Silver saw a high of $21.18 in the first quarter of 2008 and has recently broken down to 9.115, a 57% decline from its high at the beginning of this year, yes this year!
Gold like Silver has not been immune to a sever price decline, however in terms of decline, Gold has done a better job of holding up and being something of a Safe Haven.
Looking back over the past month, yes month, I cannot think of a more “Perfect Storm” for Gold to have risen. World economies came to the brink of disaster. Yet Gold from my perspective, did a very poor job of rewarding those who bought into the theme of Gold as the “end all Safe Haven”. It simply did not come to pass.
Rather, what came to pass is that the Dollar of all things is where money moved to. It amazes me that the currency that created this whole mess became the beneficiary of the meltdown. Part of this has to do with how the US is handling the Credit Crisis and part has to do with the benefits the US receives as energy and other commodity prices move lower. Given that we import most of our energy needs, the lower pricing of energy is like a tax credit. The sheer size of our economy insulates us to a degree better than that of foreign countries.
Simply put, the current thinking is that as the world’s largest economy, the USA is in a better position than competing economies to weather the current financial storm. Its not a though the Dollar has been a pillar of strength. It hasn’t. But it has been beaten down so much that given today’s circumstances and the slowdown in competing economies, the Dollar is in favor. As such, a rising Dollar coupled with falling commodity prices is taking all metals to lower price levels.
Build in a doom and gloom recession, one that many believe can last more than a year and you have the recipe that made for this situation.
Look at the Quarterly Chart below of Gold prices.
Gold has approached its first support level, the $723 price level. What is bothersome is that Stochastics were embedded and by losing their embedded to me status, it means that prices could reach down to hit the 18-Day Moving Average of Closes, currently the $638 price level.
As such, I see little reason to be Bullish on Gold until the charts offer reason to become so. Right now, the chart action from the Quarterly perspective is neutral since prices remain over the 18-Day Moving Average of Closes, but are in a pattern of making lower lows and lower highs.
Gold’s Seasonal Story
It’s important to look at the Seasonal Chart below, as provided to us by The Moore Research Center...www.mrci.com.
Look at what typically takes place in October. Be it the 34-year longer term pattern or shorter-term, the 15-years pattern, October rarely proves to be friendly to Gold prices. This October has fit well into the Seasonal Pattern.
Historically speaking, once prices get into November the odds favor that the downside price correction will have run most of its course. It can break to new lows in mid-November, so be careful about getting involved in the first bounce.
Given that we are 2/3rds of the way through October and prices have paid attention to the seasonal study, I prefer to do nothing at the moment.
Conclusion and Recommendation
As prices remain over the 18-Day Moving Average of Closes, until they get under it the longer term chart action is neutral. The shorter term chart action off the Daily Chart remains in a Bear Market mode as prices remain under the 18-Day Moving Average of Closes and momentum is picking up on the downside. The Dollar risk in selling this large a price break is not a risk I think you should take on.
Stay on the sidelines in Gold.
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