The Bullion Report For September 21, 2011: Weight Of The World

The precious metals sector has not really dimmed this year as credit and debt issues linger on. The global recession is far from over, and the ripple effects from the troubles that began in 2008 are still hitting financial quarters. As another credit downgrade hits the headlines, consider the possibility that the volatility in major currencies might bring a fresh shine to gold, silver, and the rest of the metals sector.

Italy, Spain, Portugal, Ireland, Greece, and the US - this is the current roster of global trouble spots where debt is weighing down potential recovery. In each of these areas, a major agency has downgraded the credit rating of the nation or at least cast a shadow of doubt by lowering the outlook for the same. These little checkmarks against a nation spell weakness and that has brought a slew of volatility to the markets once again.

The US dollar and Euro currency have shifted back and forth as investors try to gauge the severity, trying to find the best of the worst. One of the key weaknesses for the euro seems to lay in the potential for the whole of the euro zone to survive. The weakness in one economy, like Greece or Italy, could prove to be too much for stronger economies to remain resilient against. Places like Germany are leaned on for their apparent economic buoyancy. The dead weight of places that are getting weaker in the current poor economic environment could drag them under water. If it were limited to only one or two areas of weakness there might be a chance for things to work out well. Unfortunately, the more European nations make headlines with lowered credit statuses, the more investors will grow concerned. They will start to fear that the next headliner will become the proverbial straw to break the Euro's back.

The US dollar has also lost some of its luster as a reserve currency. The quantitative easing was a deliberate undermining of the currency that did not go unnoticed by central banks. In the latest GFMS Gold Survey paints an interesting picture of what I mean. In 2010 gold purchases by central banks were around 77 tons. This year they picked up over 200 tons so far and are forecast to add another 120 tons in the second half. The sales are to countries like Mexico, South Korea, and Russia, and seem to support a move away from the US dollar and other former "safe-haven" trades like US treasuries, German bunds, and the Japanese Yen. The Swiss Franc had seen a surge of haven interest, but their central bank has moved to intervene to keep the Franc down. That, and the potential for other banks to do the same, has kept gold on the radar for fresh acquisitions.

Unlike those interest bearing securities or national currencies, gold doesn't have to wait for a rating agency to potentially cut its outlook. Precious metals do not have to be weighed against bank interventions and changes in policy. Most of all, it currently enjoys a global appeal, especially in those centers of significant demand - China and India. In both Asian nations, gold investments have grown and enjoyed a certain level of additional buying support as each country struggles with inflation issues. Since gold is also able to serve as an inflation hedge, the perceived benefits in the midst of global uncertainty are two-fold. The US dollar and other foreign currencies just can't say the same thing right now.

Summary

The is likely no magic bullet to the debt problems facing developed nations. There are several areas of weakness that need to be addressed before any kind of real recovery will materialize. Depressing housing numbers and persistent unemployment are just the tip of the iceberg. The reduction in tax revenue at local, state and federal levels is probably keeping things it a tight spiral that will be tough to break out of. Both at home and abroad, there will still be tough times ahead. That is what keeps central banks and private investors looking for alternatives to major currencies. This is what will continue to drive support with every dip in gold and silver prices. There is not a quick fix for the global economy, but for those who are looking to diversify their reserves or try to engage in some level of potential asset preservation, there are precious metals.

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.

The Bullion Report For September 14, 2011: Turning East

News of a potential Chinese bond purchase in the Euro zone sparked an awful lot of headlines to start this week. Amid investor speculation, there is no greater monkey wrench than fundamental news out of China or India. Why do I say that? Because with such a force of funds and population those two Asian nations can wield a lot of demand potential, and that has often held the power to sway prices of many things. Among the markets that can move to the beat of this news are precious metals.

I have mentioned India in previous articles because it is such a massive area of physical gold demand, especially this time of year when weddings or festivals could fuel increases in imports. In the US there are also distinct seasons we might consider key for jewelry purchases or gifts (think: Christmas, Valentine's Day, etc.) but not with nearly the scope that India does. In the last few years this trend of watching their imports has only strengthened I think, due in part to what many analysts have seen as the growth of the middle class. The development in India has enabled many families and individuals the benefit of a higher level of disposable income for buying gifts and precious jewelry.

Another analytical point I see brought up is that farmers in rural areas have been fetching higher prices for some crops, which in turn gives them a bit more income to buy gold and silver. In rural areas this can serve as a store of that harvest season wealth. Again, there is a strong cultural link to the ownership of precious metals.

China has similar fundamental fuels for its demand drive in precious metals. These are not the only commodities that see a spotlight on Chinese demand. The main point on which the two countries seem to diverge is the interest in whether or not China is using gold as an alternative to the US dollar in its reserve. A recent release from Wikileaks seems to suggest that there is a concerted effort to do this at the expense of the US dollar. China may be among the top holders of gold in reserves, (number six, with over 1,000 metric tons according to the latest info from the People's Bank of China) but when looking at the size of their reserves, the actual percentage allocated to gold is much smaller than other developed nations. For example, the US has more than 74 percent of its reserves as the yellow metal. Germany has just over 71 percent. China's represents more like 1.6 percent. That isn't a lot considering they are the world's largest gold producer. If the central bank moves to add gold to their reserves, there is plenty of wiggle room in those ratios against foreign currencies. And that could mean plenty of upside potential just in bank demand.

Remember, just like in India, there is a decent amount of demand from regular citizens in China as well. India and China make up for more than 50 percent of the world's total physical investment demand (bars and coins), and more than half of the jewelry demand, according to the second quarter report from the World Gold Council. Continuing weakness on the global scene could easily propel more interest from these consumers. Inflation issues could also stoke the fires of demand in both nations as the growing middle classes move to preserve assets with precious metals as an inflation hedge, just like investors in western nations have been known to do.

Summary

It does seem to be redundant at this point to mention China and India as a hotbed of precious metal demand, but their needs and imports will likely impact prices and perceptions in the coming months. Europe and the United States continue to work to resolve their debt issues and economic trouble spots. China and India have to deal with price inflation. These things are what helped propel gold and silver to fresh market highs. Whether or not these two very populous locales continue to import and gain demand bases for both metals will likely provide key price support long after stimulus packages and job and morale boosting bills move through lawmakers' hands. Investors and everyday folks in urban and rural areas of Asia have probably seen their faith in traditional investments shaken as the global economy collapsed. That is the kind of fundamental nod that could keep prices finding footing on any sell-off.

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.

The Bullion Report For August 31, 2011: Name Dropping

No matter what the fundamental and technical picture in gold, there always seems to be a nod towards outside analysis. Big names in the investment world are watched, their actions and opinions on the precious metals market weighed separately as potential indicators. Just like central banks, their comings and goings from these markets can bring a lot of potential influence. Right or wrong, here is a small overview of name dropping in the world of gold and silver.




I recently read a little note on investing that mentioned days before electronic trading when people always wanted to know what the floor traders were up to. That kind of search for information still proliferates news outlets even today. There is an intense level of scrutiny that some of the biggest names fall under as investors look for probable cues regarding their particular market view. Are they bullish or bearish? What are they seeing in charts that the rest of us might miss? Do they have a cadre of analysts who can seek out minute details and research that could put them ahead of the curve? There is no end to the kind of sifting through opinions that might occur when the name being dropped is big enough.

Probably the first name that comes to mind in recent news for gold is George Soros. He removed a large stake in SPDR Gold Trust in the second quarter of this year, along with Eric Mindich. Soros Fund Management LLC’s holdings in the “exchange-traded product” went from 49,400 shares to just over 42,000. Mindich’s Eton Park Capital Management LP went from 2.328 million to 813,000. John Paulson kept his stake, which totaled about 31 and a half million shares. (1)

When news broke about Soros exiting, there was a definite negative, even bearish turn, despite the fact that several fresh high prices for gold were just around the corner. Nothing had fundamentally changed about the bullion market, but the lack of continued maintenance of a position from a big name was enough to change the demand-scape for some investors.

Another big name that has occasionally shed a negative light on gold is Warren Buffett, arguably one of the bigger names in investing. He has been quoted as saying that gold buying is a waste of time because it doesn’t produce anything. If he did say that, and I don’t have a direct quote for it, he is missing the idea that has been driving people into gold since the recession began. Gold doesn’t fall under the same follies as other stocks or related investments. It hinges on other sets of demand functions, and is often viewed as a haven because it isn’t as deeply tied to manufacturing as a metal like platinum or weighed down with internal policies like foreign currencies. These are the things that have made gold, and to a certain extent silver, attractive to other investors. They aren’t looking to make money on interest payments; they are trying to find something in the financial chaos to try to protect their assets and money they have already made.

Other investors know this; among them is Phil Streible, a market strategist who has often been quoted with higher price forecasts for gold and silver. Ed Yardeni, the president and chief investment strategist for his own research firm said, “Gold is a great hedge against out-of-control governments and their reckless fiscal and monetary policies.” Dennis Gartman of The Gartman Letter called gold, “The world’s third most popular reserve currency behind the greenback and the euro.” Both Gartman and Yardeni cautioned against potential corrections in gold’s price in recent high moves but coupled it with kind words compared to Buffett’s possible bias.

I would be remiss if I left out one big name associated with investing. Jim Rogers is the name you will often hear in the commodity world. His bullish view on things like agriculture and gold are well-known, and hold few surprises for most people. He recently mentioned to reporters for the Economic Times of India that he saw gold prices going higher. (2)

Summary

All investing carries a risk of loss, and for many of these big names a slam dunk is never a guarantee. They are fallible and make mistakes just as easily as the rest of traders. That’s the key thing to remember every time an analyst or news network drops a big name in the middle of a report on gold or silver. That kind of reporting could probably be reserved for who is wearing what at some awards show. Right now, in the throes of unprecedented unemployment, housing issues, sovereign debt concerns, and a whole heap of other economic problems it seems the prudent thing would be to focus on tried and true fundamentals. That means a genuine reflection on the strength of the US dollar and the overall demand picture for gold and silver.

1. http://www.bloomberg.com/news/2011-08-16/s...ds-options.html

2. http://www.forbes.com/sites/kenrapoza/2011...rves-downgrade/

Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.

The Bullion Report For August 24, 2011: More Gold Records Than A Pop Star

All the financial uncertainty swirling around the debt crises here and abroad have helped precious metals pull new price levels. Gold and silver have both broken out to high territory, with gold adding fresh high after fresh high. As the gold market piles on the new price records, it is worth reflecting on the milestones it is leaving behind.


Past performance is not indicative of future results.
***chart courtesy of Gecko Software

In the last issue, I looked at some of the potential high prices that people are looking for in gold. It feels like gold has been hurdling over more price forecasts set since 2008, when the financial crisis first began. There have been plenty of lows, too, but the levels reached in the 1990s (prior to the Central Bank Gold Agreement) look so far away at this point.

The high price milestones are varied, representing previous highs or psychological levels. The first big price hurdle presented itself around $850 per troy ounce. This was the spot (about $1,000 dollars ago) that the metal hit in 1980 following a mix of price inflation and geopolitical tensions centered on Soviet activity in Afghanistan. By 1999, gold was down to lows in the $200s on a confluence of rumors that central banks were going to sell their gold reserves. Fast forward a few years and gold was on its way higher ahead of US actions in the Middle East. Propelled on by a renewal of global uncertainty, it wasn’t long before gold was at the precipice of fresh decade highs again.

That key level of $850 was reached and beached at the beginning of 2008. The financial meltdown lit a fire under gold that has persisted through round after round of stimulus, recovery talk, and various ups and downs. By mid-March 2008, gold topped the key round number of $1,000 per troy ounce. The trading range built on the back of uncertainty in the equity markets was unprecedented. One day in September brought a $90 per ounce rise in spot gold prices. By October, it would revisit the high-$600s before jetting off again in subsequent months.

What fuels the movements for each new record? There seems to be a bottomless basket of things that have helped drive interest in gold. Inflation fears stemming from each fresh round of Federal Reserve quantitative easing; uncertainty in other investments; parking assets to protect against the debt issues in developed nations – a litany of things that have spurred interest in gold and silver alike (although to date, gold appears to have been the larger beneficiary). The traditional items that first moved the market over $850 an ounce haven’t disappeared either. Political tensions in the Middle East and uncertainty about the likelihood of global recovery appear to add a floor every time there are pundits calling for a top in the market.

Summary

There is no shortage of analysts trying to find weakness in the gold market or looking to shout, “Bubble!” with each new price point that is penetrated. The funny thing is there is still no shortage of people who think there is room for more records in gold. A recent informal poll/survey posted on the Wall Street Journal’s website (http://online.wsj.com/com...o-per?commentid=2950290) showed an underwhelming percentage of respondents thought gold had “topped out now” – only 13.6 percent as of the date I wrote this. Just over 19 percent saw $2,000 as the high target. 21.3 percent were aiming for $2,500, and the clear favorite was the simple answer to the question, “how high can gold go per troy ounce?” – “Higher,” said more than 46 percent of folks who participated. The message that even an unscientific poll on the internet shows is clear – the upside is apparently as expansive as ever. Like oil’s broad march over and above $100 per barrel, there seems to be a force that is seizing on the uncertainty gripping the average investor to help them overcome any fears or concerns with each high price point. Retracements are possible, profit taking is highly plausible, but there doesn’t seem to be a truly insurmountable price record for this market. Adding more fuel to the fire are rumors that are starting to build about possible continuing intervention from the Federal Reserve. Even though members were adamant that there would be no more bouts of quantitative easing, markets are looking at the possibility, which helps support prices further.

Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.

A Market Review And Opinion Report For The Week Ending August 21, 2011

Energies

Oil prices quickly retraced and are fast approaching the 2011 lows set earlier this month. Where the global economic outlook goes so goes oil prices. Significant downside should be anticipated on a break below the August 9th lows. Rbob and heating oil should follow suit, but expect natural gas to begin to trade opposite as that spread between crude and natty tightens.

Financials

The stock market tested, but failed to close above, the critical 1199 mark on the S&P I had discussed last week. Concerns over European stability continue to plague the markets which are seemingly fighting the reality that the world is in a recession. Friday offered a critical indicator as to the market’s psychology and momentum as it destroyed a decent rally attempt by the close. On a technical level there is little to suggest anything but a retest of the 1077 lows on the Sept. S&P set back on the 9th. Bonds remain bullish during this stock market mayhem, but I would look to spread 1 short mini S&P500 against 1 short 30yr T-Bond to play a lack of upside in bonds versus the downside exposure in stocks. The dollar remains a buy on dips as the congestion that is playing out offers a bunch of misleading short term signals. The long term outlook continues to be bullish, pressuring the euro, pound, Canadian and Aussie dollars. The yen is a buy on dips as well, but there should be a congestion period for a brief time as the market fights against the intervention area from just two and a half weeks ago. I continue to standby my forecast that:

The Japanese Yen futures will hit 140 before it hits 80 or I will quit writing the Weekend Commodities Review...forever.

Grains

Grains should experience serious pressure as slow exports and a weakening global economic outlook change the demand side of the equation in this sector. Look for corn and beans to get beaten down with volatility to the downside while wheat remains a spread buy against either. Rice remains a sell with puts.

Meats

Cattle turned bearish in a hurry last week and I expect significant downside through much of the remaining part of 2011, making this a bear market to jump on early. Hogs turned south once again and broke to fresh near term lows only to recover somewhat on Friday. Look for a fresh low closing price before entering into a short, which is as simple as a close below Friday’s low.




Metals

Gold and silver continue to scorch higher on a flight to quality play. This bubble is just getting bigger and bigger as the stock market tumbles and the euro falls. The problem is gold is priced globally in U.S. dollars which means if the euro is set to take a big hit then there will be a bigger gold bubble forming for the rest of the world than the one we see here in the U.S. For example, if gold is at $1850/oz and the euro drops 10% then those holding euros will see gold trading closer to something like $2,035/oz. Now let’s say gold rallies to $2,500 and the euro drops 30%, then those holding euros will see gold trading something closer to $3,250 – now we are talking one serious bubble. Silver, similar to gold, would experience currency-related pressure as the bubble gets bigger amid U.S. dollar strength. However, at what point does the inflated price of gold get ignored during a global panic and stock market meltdown? This will be the question that lies ahead. Copper remains a bear market amid a global demand slowdown. The current congestion pattern is likely to break this week.

Softs

In typical orange juice fashion the market went from freefall to v-shaped recovery all in about two weeks. The market is unlikely to maintain support and should be shorted on this bounce with straight puts. Coffee has rallied substantially on supply concerns and is fast approaching a critical resistance area, likely holding below 280. Cocoa remains a technical buy with a double stop reversal below the August 11th low. Cotton might congest with the current levels being the high of that anticipated range. That could offer a swing trade short here with stops about 400 points off Friday’s high and a target near 98. Sugar is a sell with straight puts.

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James Mound

Disclaimer: There is risk of loss in all commodities trading. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some option strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. Past Performance is not indicative of future results. Information provided is compiled by sources believed to be reliable. JMTG or its principals assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Options do not necessarily move in lock step with the underlying futures movement. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the express written consent of James Mound Trading Group LLC.