Expect Upward Moves for Oil and Silver

The market wants to continue the rally that sprang to life Wednesday. This can only be interpreted as looking for an excuse to rally. Crude oil looked to be in oversupply, and with questions about the strength of the economic recovery, was teetering on dropping.

Eight million barrels of imported oil didn’t show up in port last week. Oil, gasoline and distillates inventory in total dropped 11.2 million barrels! The market caught the fever from the commodity trading pits, and we were off to the races. Does this make sense? No, higher crude oil prices suck money out of the economy faster than even Oh! Bama and Congress can. Higher gasoline prices take money from every consumer's pocket.

We wrote “get long oil, the trade is on.” But, later in the article, caution was urged as next week’s inventory may show the missing barrels reappearing. It seems the government is always revising employment, inflation, and GDP numbers. The initial reports always seem better for public consumption than the revision that comes out later.

Yesterday, traders must have come to the same realization as crude trended lower. Another reason for caution, yesterday was the last trading day for NY Light Crude and today is options expiration, funny things can happen. For a small fee (less than four cents per barrel) a tanker can be delayed for a day. If I had large positions that needed a little juice in the market, the cost of keeping tankers out a few days would be tempting.

As soon as we think we understand the movements and motivations of the market, we are thrown a curve, and have to reassess our suppositions. Where do we go from here?

It will not surprise me to see oil prices soften through next Tuesday. Then, we roll the dice on the new inventory report! Rather than being long, shorting the USO may be the best play, with a stop loss!

George Kengott at First National Bullion sent a note about silver yesterday. George tells me the Chinese government is encouraging citizens to buy silver. Chinese citizens were barred from owning precious metals before. George makes the point that the total silver traded and consumed last year amounts to less than one-third of the Chinese capital available. He finishes his message with “Don’t wait to buy Gold and Silver, buy Gold and Silver and wait.” That is a nice twist on words, and tells the whole story.

Gold and silver have pulled back in the last two weeks. Many reasons can be given, such as a stronger dollar, weak economic recovery, and moving in tandem with the equity market. The chart below shows the relationship of GLD to SLV. The ratio currently sits at 6.7 It takes 6.7 shares of SLV to buy one share of GLD. The chart shows the last three years with a 700 day simple moving average. The historical ratio seems to be more in the 5.3 range.

Do you think gold is going to get cheaper, or will silver increase in price to bring the ratio back to its norm? SLV would have to increase 27% to $17.40 per share to bring the ratio back to 5.3, at yesterday's GLD closing price. We are playing silver in SwingTrader, and own a great miner in the Long-Term Portfolio. I would encourage you to get some silver.

Disclosure: Short USO

Comments

[Larry House:]

Gold and silver bullion always make sense as a long-term porfolio diversifier, not as trading fodder. Everyone is expecting oil to collapse, or soften, as you say, and the stock market should go that way as well. It just isn't happening yet, and it may happen suddenly and catch us all off guard. I continue to be long stocks, including energy stocks. I probably should short USO just as a hedge for my long positions.

Aug 21 10:21 AM

[GMiki1:]

I got out of DXO a while back having made some profit. If oil drops to $60 I'll get back in. Yes, gold and silver, for absolute sure. Have some physical.

Aug 21 10:31 AM

[LIVE FREE O...:]

Sorry I had attached my comments to the wrong article. The comments below are for this article.

John - Short silver (puts on SLV or long ZSL). We are in a recession/depression with deflation. All commodities go down with stocks under these circumstances. When the dust has settled and another 10 trillion dollars is wiped out, gold will be look'n good but for now silver has topped and is sliding down.

Great article as always.

Thx!

Aug 21 12:00 PM

[Silver nut:]

I question the blarney about the effect of the Chinese letting their citizens acquire silver recently. My information is that China opened that market in 2000 but it was only recently that their government advertized and ENCOURAGED people to acquire bullion. Whether that makes a real difference would be anyone's guess. I often think all this talk about the market power of China is overated. After all their GDP is only the size of Germany. And where the government pulls all the strings and not the economy that determines the markets I still think we should take a second look at their importance. It is nice to have them holding 2T of our debt. With the value of that about to vanish we might wonder how smart they are after all.

Aug 21 12:12 PM

[Slavak09:]

Hold out a cargo for 4 cents a bbl??? Maybe...I would more likely believe tanker delivery schedules being driven by dock utilization and maintenance schedules than any specific intent on part of traders and schedulers. Also, shoreside delivery can more often than not be impacted by ETA of VLCC's at lightering positions off of Galveston and Bahamas....then subsequent scheduling of daughter vessels to lift 500 k bbl parcels and deliver ashore into afrementioned dock utilization schedules. 8 mmbbls is approximately 2 VLCC's cargo volume. So go figure.....

Aug 21 02:45 PM

[john s. gordon:]

manipulation of the oil market continues, to the benefit of the puppetmasters who hold the strings/
> jack

Aug 22 09:04 AM

[The Greates...:]

Oil in our government:
Combined with its $6.8 million outlay in the first quarter, Chevron spent about $12.8 million on lobbying in the first half of 2009, the fourth-highest tab for companies and organizations that file disclosure reports, according to data from the Center for Responsive Politics.
Chevron, the second-largest U.S. oil company behind Exxon Mobil Corp., spent $3.2 million on lobbying in the second quarter of 2008.
In the most-recent period, Chevron lobbied on a variety of issues, including legislation dealing with market speculation and manipulation and Federal Trade Commission rulemaking. It also weighed in on environmental matters and industry-specific issues such as hydraulic fracturing, according to the disclosure form filed July 17 with the House clerk's office.
Besides Congress, Chevron lobbied the departments of Energy, State, Commerce, Treasury as well as the Environmental Protection Agency and the Executive Office of the President.
Among those lobbying for Chevron were Lisa Barry, the former principal deputy assistant secretary at the Commerce Department, and Judy Blanchard, former deputy staff director for the House Committee on Oversight and Government Reform.
www.opensecrets.org/
Congress needs term limits.
Earlier this week, the U.S. government reported that crude in storage, which had been building for weeks, fell by a surprising 8.4 million barrels as refiners cut back on petroleum imports. Crude prices jumped sharply.
Not because of any recovery, and Congress needs term limits.

Aug 22 09:39 AM

[Jimbo:]

Yes,indeed. Congress needs term limits for any number of reasons. It is my understanding that Senator Cox and Senator,now vice president, Biden, both got elected out of law school and have never held any job in the economy. Congress needs to come home and live under the laws they have passed for the rest of us. I also understand my two Senators and Representative (Florida) are unwilling to respond to my letter asking them to include members of Congress and their employees in any health care bill that gets passed. The silence is deafening.

Aug 22 01:07 PM

[HA65MPH:]

Our Govt. is a cesspool !...it stinks to high HEAVEN !...The corruption is very Blatant...How can we Revolt ???...

Aug 22 01:12 PM

[Slavak09:]

Another point I missed saying earlier is August is end of driving season for refiners and many refineries get taken down or run at lower charge rates while maintenance (called "turnarounds"). So is not infeasible that end users who bought foreign crude cargoes simply ordered the ships to delay coming to dock in light of reduced demand at the refinery gate.....Again the realities of running a complex business trump the conspiracy theories of those who push paper for a living.

Also another major point to counter the conspiracy theorists is who's left to do the manipulating? Most of the usual suspects in terms of trading houses and hedge funds are no longer in business.

To answer the knuckleheaded comment about the amount the IOC's spend on lobbying, I would say why not given how Congress plays lapdog to those who want to put them out of business. Of course they have to spend money to defend theri interests. If you were in their shoes, YOU WOULD TOO!!

As far as the Government being in the pocket of "Big Oil" (brackets intended to highlight that many pols now label independent E&P operators with that epithet and not just the IOC's), I say BALDERDASH!! I have been in oil patch for 30 years and only times I've ever seen Government do anything for Major Oil was when they first came with palms open and outstretched.

It is an established fact that when the Alternate Revenue Service (a.k.a. The US EPA) comes to do an enviro audit at a plant or facility, they won't leave until they find something to write a citation on. In some places that's called extortion. Here it's called regulation with arcane language.

Aug 22 08:40 PM

[realold:]

Keep voting them out, not re-electing these awful senators. Barbara Boxer, are you kidding me?


On Aug 22 08:40 PM Slavak09 wrote:

> Another point I missed saying earlier is August is end of driving
> season for refiners and many refineries get taken down or run at
> lower charge rates while maintenance (called "turnarounds"). So is
> not infeasible that end users who bought foreign crude cargoes simply
> ordered the ships to delay coming to dock in light of reduced demand
> at the refinery gate.....Again the realities of running a complex
> business trump the conspiracy theories of those who push paper for
> a living.
>
> Also another major point to counter the conspiracy theorists is who's
> left to do the manipulating? Most of the usual suspects in terms
> of trading houses and hedge funds are no longer in business.
>
> To answer the knuckleheaded comment about the amount the IOC's spend
> on lobbying, I would say why not given how Congress plays lapdog
> to those who want to put them out of business. Of course they have
> to spend money to defend theri interests. If you were in their shoes,
> YOU WOULD TOO!!
>
> As far as the Government being in the pocket of "Big Oil" (brackets
> intended to highlight that many pols now label independent E&P
> operators with that epithet and not just the IOC's), I say BALDERDASH!!
> I have been in oil patch for 30 years and only times I've ever seen
> Government do anything for Major Oil was when they first came with
> palms open and outstretched.
>
> It is an established fact that when the Alternate Revenue Service
> (a.k.a. The US EPA) comes to do an enviro audit at a plant or facility,
> they won't leave until they find something to write a citation on.
> In some places that's called extortion. Here it's called regulation
> with arcane language.

Aug 22 08:48 PM

[David White:]

I agree with you about shorting USO near term. There are so many reasons I wrote an article about just that. I also agree with you about the tight stop. The market broke through a strong technical resistance point on Friday. That could mean a rally of 5% to 10% more. That would push oil prices up with it. Of course, the breakout could fail on Monday just as easily. We have already gone up more than 50% since the Mar. lows. there are more reasons for a retracement than a rally. Read the reasons I list for a near term oil retreat in my article:
seekingalpha.com/insta...

Definitely use a tight stop.

Aug 23 07:26 PM

[MudEngineer:]

Actually get everyone you know who feels the same to get registered to vote and then make sure that they do. It worked for the Marxist scumbag now in office so why not for us. If they pass the law legalizing all the illegal aliens, even our mobilizing voters may not be enough. Make sure you all let Washington know that you do not want any kind of amnesty for illegals or we may be screwed.

If the government didn't keep us all fighting against each other, we could actually vote out every last one of those overspending scumbags and start over with fresh people who agree upfront to a single term in office. Wouldn't that be refreshing?


On Aug 22 01:12 PM HA65MPH wrote:

> Our Govt. is a cesspool !...it stinks to high HEAVEN !...The corruption
> is very Blatant...How can we Revolt ???...

Aug 23 07:42 PM