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By Brad Zigler
You'll be forgiven if all the recent selling has you exhausted. Perhaps you'll be comforted to know that the selling itself may be exhausted, at least for some commodities.Let's not get ahead of ourselves, though. First, let's look at last week's key markets.
COMEX spot gold finished 2% lower at just under $717 an ounce and near the week's lows. The deeply oversold market tipped some technical indicators toward the bullish side, but a close above $796 would still be needed to establish the presence of a short-term low. For the active December contract, add a couple of dollars to that price threshold.
The gold market's been liquidating at an increasingly torrid pace over the past month. As the per-ounce cost of gold shed nearly $150, net long interest in COMEX futures held by hedge funds and other large speculators was pared by more than a third. That bearishness, however, shows some signs of exhaustion. Commercial net short positions have been whittled by more than 41% as hedging interest seemed to dry up like water droplets in a hot skillet in the past two reporting weeks.
The interest picture, in fact, looks a lot like August 2007, and we all know what happened to gold prices then. That said, follow-through this week will be pivotal for gold bulls.
While bullion price action was lackluster last week, gold mining stocks, tracked by the Market Vectors Gold Miners (GDX) exchange-traded fund, sparkled. The stocks in the ETF's underlying index have been battered for months, but they reversed course and rose an impressive 18% last week, forcing the bullion-to-mining stock ratio below its 20-day moving average for the first time since September. That's another reason this week should be decisive. Are miners finally cheap enough to attract sustainable buying interest? We'll see. And we'll touch on this subject again a little later.
SPDR Gold Shares (GLD)/Market Vectors Gold Miners ETF (GDX) Ratio
Another ratio that was closely watched last week was the gold/silver ratio. The white metal probed the market - the London morning fixing, that is - under the $9 level, and found reactive buying interest which pushed the white metal to taste the air briefly just above $10. In the end, though, the gold/silver ratio returned to its starting point for the week at 78-to-1. The ratio topped out at 84-to-1 in mid-October.
Gold/Silver Ratio
Enough about yellow gold. What about black gold? What about crude oil?
Well, after starting weakly, spot crude ended the week about 6% higher. Commercial hedging interest, though, picked up, indicating growing concerns about future price weakness. At the same time, there was a substantial build in futures' open interest to levels not seen since mid-September, signaling a respite in liquidations.
Early in the week, as crude oil prices ratcheted lower, refining margins were at the 8% level, but by week's end, dipped back below 6%. Friday was Hallowe'en, a day that last year marked a seasonal bottom in the crack spread. A crack spread, if you're not familiar with the term, refers to the potential profit that can be earned by selling refined products such as gasoline and heating oil after paying for crude oil feedstocks. The spread typically improves over winter. After all the tricks and treats last year, refining margins doubled to over 13% by mid-December as crude prices eased and product prices firmed. There may soon be treats for this year's crop of spreaders. If you want to learn more about the spread and how to use it as an investment barometer, read the Hard Assets Investor article titled "Time For Crack Spreads?".
NYMEX Spot Crude Vs. Refining Margins
Last week's uptick in oil prices was accompanied by an even bigger gain in natural gas prices. Nearby Henry Hub futures rose nearly 9% for the week as the crude oil energy premium weakened to new seasonal lows - less than half its pre-Labor Day level. There's another very reliable spread opportunity you can learn about in a Hard Assets Investor article named "Spreading Oil And Natural Gas".
All this action took place as the dollar took a deflationary breather. At Hard Assets Investor, we've got a real-time gauge of monetary inflation that ticked back up to a 9% annual rate, nearly a half-percentage point higher than the previous week's reading. It may be a little early to call for a reflation, but that's the biggest break in the deflationary trend we've seen since mid-September.
U.S. Monetary Inflation Vs. Gold
By week's end, the dollar cheapened against the euro by 2 cents, but only after reaching a new high for the year on Wednesday. Banks traded euros at an average price between $1.30 and $1.31 on Friday. Back on Independence Day - just four months ago - the euro was worth more than $1.58.
Now back to gold - something that's constantly on the mind of Van Eck portfolio manager Joe Foster. Last week, we recapped a talk we had with him about the yellow metal's prospects. Foster believes gold fundamentals will reassert themselves as soon as the current crisis phase runs its course. Then, he figures, the market's love affair with the greenback will grow cold. The protracted nature of the banking and housing crisis is ultimately bullish for gold, he says, since it will prompt the Fed to maintain an easy money policy to prop up the economy. The government's on a debt binge that'll eventually be monetized, says Foster.
Foster's taking a long-range view, though, by looking at the gold market as a sequence of phases: first, a crisis mode and a deflationary scare for a year or two, then, as the economy starts to recover, an inflationary period that could rival that of the 1970s.
Gold's prospects during the crisis phase are murky. We're clearly in new territory here. Remember, the last time we had a chance to gauge gold's performance in a deflationary environment was during the Great Depression, and back then, the price was artificially fixed.
It's in the inflationary phase that gold's performance seems more predictable. Foster's not putting a price target out, but he does feel the inflationary period will be long-lived.
As for when we move out of the deflationary scare into inflation mode, our real-time indicator can help us. According to the indicator, dollar deflation looks like it actually started in March. If Foster's right, we could see reflation begin as soon as 2009's second quarter.
So somewhere in here, says Foster, is a buying opportunity for gold bullion or, most especially, gold mining stocks. He's particularly keen on well-managed producers with good cash flow such as Kinross Gold Corp. (KGC), now about 40% below its 200-day moving average price.
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chicagocheap.com
If commercials are reducing their net positions it means that the current prices are too low. They will be much more likely to wait for another rally in price back to 'realistic' levels before taking any more positions on the short side for future delivery.
The commercials aren't stupid. They close out their short positions when prices get "too low" and re-establish them when prices are "too high". It's their business to know what they're doing. When they all do the same thing, it's telling you something (or it ought to be).
Of course pinpoint timing is another story. Commercial Open interest figures will tell you which way the big boys are leaning though. Keep your eyes open.
3 November 2008
Posted to the web 3 November 2008
The Reserve Bank of Zimbabwe faces some tricky decisions this week; cash withdrawal limits clearly have to be raised, but the questions are by how much and how often.
The digital money supply now appears to be beyond much control by the Reserve Bank or anyone else; the creation of new money to pay essential State bills must be significantly less than the expansion of money supply coming from the equity markets and the arbitraging between exchange rates that seems to dominate the "dealer" economy.
In a sense, the growth in "digital" money supply is now dominated by market transactions rather than by central bank fiat and that means that control over that "digital" money supply has been lost by everyone, including the authorities.
The tighter control of cash prices, arising from the fact that the RBZ does have total control over how much cash is in circulation, has benefited the lower paid groups, which now include what used to be referred to as the middle classes, or anyone else whose monthly salary is less than the minimum deposit into an equity unit trust.
For many people the amount of money that can be withdrawn in cash each month by an individual is their monthly pay. You need thousands of times more than that sum to buy much extra from a shop with a card, or invest on the stock exchange, or play the foreign currency markets at cheque rates.
In October the difference in prices between cash and cheques meant that a person would need billions of dollars to double the standard of living given by an income of around $2 million a month.
So when setting the limits, the RBZ needs to consider what a family needs to survive. The $50 000 set a few weeks ago is now obviously totally inadequate; it should have been raised at least a week ago and probably raised a bit earlier still.
But increasing the amount of cash in circulation will raise prices unless there is an increase in the amount of goods available, something unlikely at the moment.
That has to be accepted, although pressure from the authorities can possibly slow the rise in prices.
So probably the only way to keep this somewhat weird survival strategy going is to raise the daily cash withdrawal limit moderately and fairly frequently. The figure could easily be set at $500 000 this week with greater limits set later in the month.
In a sense, the RBZ has to look at the cost of essential basic food and things like viable bus fares, and set the cash withdrawal limits accordingly.
The vast gap between cash and card prices does mean that money is starting to be destroyed, by the very market forces that caused some of the problems is the first place, but that does not mean ordinary people should be refused the right to buy essential food and services.
The whole problem of accelerating hyper-inflation puts ever more pressure on the politicians to reach a political agreement, so that a nationally accepted strategy can be put in place and rigorously implemented to bring inflation under control.
Relevant Links
Southern Africa
Economy, Business and Finance
Zimbabwe
We hope we can see a viable cash limit this week, and then more regular increases to keep pace with inflation during the month.
You can find some transcripts here:
jimrogers-investments..../
jegan;-)
well stated.
For gold, net shorts topped out as prices reached their spring peak. Sellers, thus, locked in the market's highest prices through futures. Commercial net short interest has since been lightened to a level not seen in years,
On Nov 03 04:31 PM Smarty_Pants wrote:
> If commercial open interest is declining then another upleg is about
> to start shortly. Maybe it won't be the onset of the "big one" but
> prices are very likely to move higher from here.
>
> If commercials are reducing their net positions it means that the
> current prices are too low. They will be much more likely to wait
> for another rally in price back to 'realistic' levels before taking
> any more positions on the short side for future delivery.
>
> The commercials aren't stupid. They close out their short positions
> when prices get "too low" and re-establish them when prices are "too
> high". It's their business to know what they're doing. When they
> all do the same thing, it's telling you something (or it ought to
> be).
>
> Of course pinpoint timing is another story. Commercial Open interest
> figures will tell you which way the big boys are leaning though.
> Keep your eyes open.