Seeking Alpha
Long/short equity, momentum, event-driven, research analyst
Profile| Send Message| ()  

Show Me the Money - or Lack of It!

The rumor mill continues to churn as the myths morph into perceived reality. It is an interesting time in which we live. Managing expectations can be a costly task. This seems to be the case within the precious metals as the FOMC did not deliver (immediately) upon its earlier hint of QE III. In reality, the knee jerk reaction of selling seems limited in comparison to the deflationary forces that have been brewing in the background.

Reality always wins in the end. As much as I hate to admit it this is the case. Deflation is not a good thing, and I would prefer not to see it take hold again. Gold, silver and platinum prices will not escape the downward pressure on prices should deflation return. As previously discussed, although history has shown that gold tends to retain its purchasing power when compared to other commodities during periods of deflation, it along with other precious metals will not escape the downward price pressure.

The status quo appears to be firmly holding on to the belief that the economies of the world are running towards inflationary times versus deflationary. Perception is that inflation is a persistent problem and a global threat. Post WW II there has not been any significant or sustained period of deflation. So it comes as no surprise that without any direct experience to rely on the huddled masses are more easily herded into believing it is inflation we have to worry about. Meanwhile, the global economies are still teetering and could just as easily be tipped towards deflation.

The S&P Insurance Index (chart below) gives a great deal of support to another round of deflation taking place before the inflationary prophecies are realized. Please do not misunderstand that I do fully expect inflation to hit - big time - but not just yet.

From a December 20, 2010 article in The Globe and Mail entitled "Deflation 'worst possible world' for Insurers" a bit of background for the deflation argument:

If deflation ever breaks out, the investment to dump the fastest might come as a surprise: the shares of life insurers.

Compared to most industries, life insurance companies have an unusually large vulnerability to periods of falling prices, when they suffer a kind of mathematical vengeance from actuarial hell.

Life insurers make promises to pay people for insurance or annuities many decades hence based on today's assumptions about the likely amount of compounded future returns from investments. By depressing long-term investment returns, deflation plays havoc with this process. In Japan, the only advanced country that has experienced deflation in the modern era, the life insurance industry has taken it on the chin.

The recovery rally within the insurance sector has been meager and weak. Unable to muster enough steam to retrace much more than 37 percent of the tumble from the 2007 high to the 2009 low. In fact the chart shows that thus far the recovery rally topped in February 2011 - over a year ago! The NASDAQ 100 and the S&P 500 recently put in additional recovery highs while the insurance sector trails behind and shows signs of exhaustion. The status quo is again being challenged. To hang on to it could prove to be a mistake.

(click to enlarge)

Gold, Silver & Platinum Update

Gold finally moved out of its range bound trading pattern with a thrust lower last Wednesday. The lower end of the support zone at 158.10 (GLD) was penetrated with follow through which opens the door for a "quick slide" down to next support at 140 to 145. In fact that support zone extends a bit lower to 136. The break below 158 also presents a clearer picture in that the correction that started off of the mid-2011 high is most likely still in force.

The short rally in progress appears complete or nearly so. Once again opening the path of least resistance to being "down".

(click to enlarge)

Silver (SLV)

It would appear that silver has a much more difficult task in mounting a sustained rally. The mid-term picture remains cloudy - not hopeless as some may suggest. The support zone (31-29 has been containing the selling thus far. Without enough upward momentum, though, the expected next leg up remains on hold and may not begin in earnest until an additional low (under 30.11) in put in place. A serious breach of the bottom end of support at 29 flips the near to mid-term picture back to negative with a continued drop below 25.65 in the cards.

(click to enlarge)

Platinum (PPLT)

Platinum remains within near to mid-term expectations. Support at 157 - 155 has been reached and while the pattern in progress allows for some "wallowing" around towards the bottom of the zone it should hold. Mid-term expectations remain for an additional leg up similar if not stronger than the advance off of the 133 low in December 2011. The 190 to 200 area is well within the realm of possibilities. In fact my expectations are for the 190 area to be reached as a minimum.

The oscillators are somewhat mixed though, with the MFI oscillator showing that sellers continue to dominate direction. I would caution not to be quick in dismissing platinum's return to trading at a premium to gold as a mirage. It may ultimately provide upward price acceleration as short positions are covered.

(click to enlarge)

Near-term end thoughts...

...with the holiday weekend behind us, European traders returned to digest and react to Friday's release of the US Non-farm Payroll numbers and trade data out of China.

Volatility was kicked up a few pegs from renewed gyrations within the Euro/Dollar as this market dictated precious metals prices. Platinum dropped in line with the news as gold and silver initially fell but found strong buy interest when Eurozone sovereign debt concerns were pushed to the front page. Ultimately, rallies in the precious metals are expected to resume. The intensity should be measurable via volatility and I would look for platinum and silver to benefit more than gold.

Source: Gold, Silver And Platinum Update - 'Show Me The Money!'